Avoiding a Debt Crisis

Avoiding a Debt Crisis
AP Photo/J. David Ake, File
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WASHINGTON -- The Congressional Budget Office last week released its annual budget and economic outlook report, and although the news was gruesome, the report was greeted in Washington with a giant yawn. The assumption among Republicans and Democrats is that the political rewards for curbing runaway budget deficits are too meager to justify the risks. There's a consensus to do nothing -- and to hope that nothing goes disastrously wrong.

Just how large are impending deficits? Here are the CBO projections.

From 2019 to 2028, the federal government will run cumulative annual deficits of $12.4 trillion. The deficits -- the gap between what government spends and what it collects in taxes -- average about 5 percent of the economy (gross domestic product, or GDP). Since 1950, deficits have equaled or exceeded 5 percent of GDP in only six years (1983, 1985 and 2009-2012), and most of these occurred after deep recessions. These reduce tax revenues and boost "safety net" spending (unemployment insurance, food stamps and the like).

By contrast, today's deficits occur with low unemployment and an economy that's been expanding for nine years.

Even the CBO figures may be optimistic if they're based on unrealistic assumptions. Defense spending as a share of GDP is projected to fall; in a dangerous world, that may not happen. Similarly, some personal tax cuts are scheduled to expire at the end of 2025; many observers think Congress will extend them. Adding these amounts to government borrowing would increase the federal debt -- the total of all past deficits -- to more than 100 percent of GDP, about as large as right after World War II.

No one knows the consequences of these unprecedented peacetime deficits, but the CBO has listed some possibilities:

-- They may further raise interest rates, which would increase deficits, squeeze other federal programs and crowd out borrowing by businesses for factories, machinery, computers and buildings. This last effect could imperil living standards.

-- Government might find it difficult to respond to national emergencies, whether war, natural disaster or a financial crisis, because more borrowing on top of today's deficits would be harder.

-- We could face a full-blown debt crisis. As CBO Director Keith Hall recently testified, "investors would become unwilling to finance the government's borrowing unless they were compensated with very high interest rates." That could trigger draconian spending cuts or tax increases -- and a stiff recession.

There can no longer be any pretense that the deficits reflect the aftermath of the Great Recession or other temporary forces. The main cause is political expediency: It's more popular to increase spending and cut taxes than the opposite. Combined with an aging population, which automatically raises Social Security and Medicare spending, the profligacy becomes self-fulfilling.

The deteriorating political climate is reflected in a small incident showing the deep divide between parties. On March 27, The Washington Post published an op-ed piece by five conservative economists from Stanford University's Hoover Institution. They warned of an approaching "debt crisis" if ballooning budget deficits weren't reversed. The savings should come from lower spending, not higher taxes, they said.

On April 9, five Democratic economists issued a rejoinder in the Post, rejecting the Hoover economists' suggestion that spending cuts for "entitlements" -- mainly programs for the elderly and the poor -- bear all the burden of cuts.

It would be more useful if the rival economists had collaborated to produce a consensus agreement that would -- over, say, a decade -- balance the budget. Make no mistake: This would be an immensely unpopular document. In today's dollars, balancing the budget would require annual spending cuts and tax increases of about $1 trillion dollars. That's equal to about a fifth of federal spending, which is now being borrowed.

Social Security and other "safety net" programs would have to be reduced, possibly through higher eligibility ages and more means-testing. These entitlements constitute about 70 percent of federal spending; if they're ignored, the entire adjustment would fall on other spending (other domestic programs and defense) and taxes. Still, taxes would have to rise too, probably by hundreds of billions annually. Otherwise, spending cuts would be unacceptably severe.

If we are to discuss these choices sensibly, we must know what the choices are. But the vague generalities offered by both the Republican and Democratic economists seem more intended to burnish their partisan credentials than to inform the public. The longer this continues, the riskier it becomes.

On this, the conservatives and liberals probably agree. Say the conservative economists: "There is no current evidence ... that a crisis is on the horizon. But a debt crisis does not come slowly and visibly like a rising tide. It comes without warning, like an earthquake, as short-term bondholders attempt to escape the fiscal carnage." We have been forewarned.

(c) 2018, The Washington Post Writers Group




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