A few months ago, the federal debt we have accumulated over the past decades crossed the $22 trillion mark. That’s a record. And it’s surely not going to be the last.
According to Congressional Budget Office estimates, annual federal deficits over the next decade — the deficit is the annual figure for how much more Congress and the president opt to spend than the government takes in as revenue — are expected to average $1.2 trillion. Overall, the debt held by the public amounts to about 78 percent of our gross domestic product.
That’s double what it was before the 2008 recession, and the CBO estimates that without significant changes, it’ll rise to 118 percent over the next 20 years, higher even than right after World War II.
Does this matter? Back when I was in Congress, I came away confused practically every time I listened to an economist offer an opinion. Some thought it mattered immensely. Others, not at all.
Indeed, I remember when the prospect of running a deficit of a few billion dollars caused fiscal experts to say we were facing fiscal catastrophe. They turned out to be wrong. The system has been able to carry heavier debt than we once thought. The problem is, all we know is that we’re okay so far; we have no idea when we suddenly won’t be.
Here’s a useful way to look at it. Interest on the debt is expected to hit $390 billion this year. We’re paying more in interest on the debt than we spend on our children, and we’re headed toward doing the same with defense. I doubt that fits the priorities of most Americans. And I don’t think it’s sustainable indefinitely. It may even be dangerous.
At a certain level, carrying such huge debt — and spending so much each year to pay off the interest — makes it harder for the government to respond to future challenges and raises the risk of an economic crisis with no gas in the tank left to accelerate out of it.
It may crowd out both public and private investment, because there’s less money for the government to invest in human capital or infrastructure, and private capital flows into government bonds rather than other avenues that might stoke economic growth. Or investors may decide that the U.S. government isn’t credit-worthy after all, and either push up interest rates or find a different currency to back, forcing the dollar’s value to plummet.
The bottom line is that ultimately government spending has to be paid for. Deficits don’t replace that need, they merely defer it.
The problem is that attacking yearly deficits is politically very difficult. They have to be addressed on both the spending and the revenue side — that is, with both spending cuts and tax increases — but there’s not much appetite in Washington for either. Even though politicians know full well that it’s not a question of whether we need to raise taxes or cut spending, just of when.
In the end, I believe strongly that the first rule for any policy-maker ought to be: Do no harm. This requires a shift in our thinking about spending policies: If something is really important to do, it’s worth paying for and not pushing the cost into the future and on to the backs of our children. If no one’s willing to do what it takes to pay for it, maybe it’s not as high a priority as its backers think.
Similarly, we need to get real about taxes. It’s hugely seductive to politicians to believe that tax cuts pay for themselves by boosting economic activity and hence tax revenues. There’s no evidence that this is how things work in the real world, however. Instead, deficits just keep increasing.
So do we need to panic? No. But we must not take the view that the question is irrelevant. Far better to begin now to address the problem gradually than to be forced into sudden and drastic measures by a crisis we all knew was coming, but didn’t have the will to forestall.