This post takes a break in the GEM Blog’s mission to explicate generalized-exchange modeling, substituting a policy update. With the constant political turmoil in Washington, some really important recent news got lost. The Congressional Budget Office released projections indicating that the federal government annual deficit, given unchanged fiscal policy, will exceed a trillion dollars by 2020. Again with unchanged policy (e.g., no deficit-financed ambitious federal infrastructure program or “beautiful” wall along the Southern border), the total national debt which today is just above $21 trillion is projected to reach $33 trillion in 2028. That would make the publicly held portion of the debt equal to the total U.S. gross national product. Fiscal-policy experts consider that close to or past an extreme crisis point that unleashes unmanageable reactions, greatly damaging the well-being of the country at large.
My conclusions are rooted in considerable expertise. I ran macroeconomic analysis at the CBO, producing many deficit/debt projections, during the last time (the early 1980s) a large tax cut (absent significant spending reductions) threatened to generate an extended run of outsized federal deficits. The experience produced perspective, summarized below, that is useful in making sense of the recent hurried sharp turn in fiscal policy.
First, the projections are not a mistake. Especially in periods of full employment which we are clearly experiencing today, accurate deficit/debt projections are relatively easy to do. I could have come up with a result similar to CBO’s with a pencil and the back of an envelope. We must face up to it. With unchanged fiscal policy, the credit of the United States during the CBO’s timeline is going to become a hot mess.
Second, accelerating economic growth will not reduce the projected deficits. The cyclical recovery is largely complete. Over the next two decades, hoped-for growth in employment and output above recent trends will not happen. In fact, discernible economic headwinds will work to significantly slow growth. Most notably, demographic forces (pretty easy to project) will lead in reducing employment growth to about a third of the rate recorded over the past decade. Moreover, immigration is also likely to slow as a result of more restrictive policy. What about the stimulative effect of the tax cut? Here’s what long experience has taught us. In a full-employment environment, the effect on economic growth will be modest and relatively short-lived. Do not bet on any other outcome. There is no feasible path for the stimulative effect to be nearly large enough to offset, for example, the demographic headwinds. Finally, what about the recent and prospective regulatory reforms? Their positive effect on growth will be significant but still, by their nature, cannot come close to preventing the coming fiscal train-wreck.
Third, what exactly is the train-wreck? Maybe we really don’t need to worry about deficits. That appears to be the prevailing attitude in Congress and the White House. Such wishful thinking is at the heart of today’s brewing fiscal disaster. Nobody who matters in Washington is worried about running chronically huge federal deficits in periods of full employment. Republicans used to enforce some fiscal sanity. In my day, they abandoned the Reagan supply-side revolution to enforce tax increases in response to the chronically large 1980s deficits that robust economic growth failed to eliminate.
The remainder of this post consider two of the burdens that the longer-term irresponsibility of the Congress, especially the Republicans, and the White House will impose on the people of the United States. Interest rates are inevitably going to rise significantly from the extraordinarily low levels that have prevailed since the global Great Recession. Indeed, part of the increase will result from market pressure from chronic outsized borrowings by the U.S. Treasury. The huge and rapidly increasing federal debt will be serviced at those rising rates. Ever-higher debt service will crowd out other, very popular federal spending. Enormously hard choices that Congress has been chronically unable to make will have to be made. An unhappy electorate will make governments increasingly unstable, making nearly impossible choices even more difficult. And remember, all this will be occurring when chronic underfunding of Social Security and Medicare will be coming to a head, creating a momentous fiscal crisis of their own.
Here is the worst news. Eventually, as the simple math of unsustainable debt catches up to our head-in-the-sand politics (somewhere not far removed from when the national debt exceeds GNP), purchasers of U.S. Treasury bills and bonds will become increasingly reluctant to add to their holdings. Damaged U.S. creditworthiness is the endgame to the fiscal irresponsibility that Washington so casually embraces today. Endgame choices are not pretty: sharply increased taxes combined with sharply decreased government spending, double-digit price inflation (generating its own barley manageable burdens), and debt default (speaking of unmanageable burdens).
What can our elected officials be thinking, kicking this timebomb down the road? More to the point, why do we let them get away with their evident collapse of good sense and political will?
Blog Type: Policy/Topical Saint Joseph, Michigan