There’s a recently trending view among economists and commentators that deficits don’t matter as much anymore.
Former International Monetary Fund (IMF) Chief Economist Olivier Blanchard started the trend in a January speech to the American Economists Association outlining a case for the affordability of additional government debt. This was followed by a prominent feature in Foreign Affairs magazine by prestigious economists, Jason Furman and Larry Summers, that made the case that deficits aren’t as a dangerous as traditional economists have thought and that “politicians and policymakers should focus on urgent social problems, not deficits.”
Furman and Summers unironically subtitled their piece: “How Washington Should End its Debt Obsession.” If more than doubling the national debt in a decade followed by massive spending boosts and tax cuts in the face of the largest non-recession, peacetime deficits in American history is what “debt obsession” looks like – I’d hate to see what the Debt Indifference Era that they are pining for would look like.
The premise of these arguments is that interest rates on government debt have defied expectations by remaining unusually low despite historically large and growing debts. Despite a 288% increase in the national debt over the past 20 years our interest payments have only increased by 7%.
As long as economic growth is outpacing interest costs, they contend, then governments can afford to take on more debt. And since our interest rates are so favorable, then we should utilize these low-interest loans to continue borrowing to make productive investments.
Or to paraphrase, they are saying, look, we know you are obese and trending towards morbid obesity. But now’s not the time to diet. You are still able to walk and the discount at the all-you-can-eat buffet is too great to turn down.
Welcome to the era of Golden Corral Economics.
This live-for-the-moment attitude towards our nation’s fiscal policy could not come at a worse time. This movement (in addition to the more fringy MMT theory) is a doctor’s note to excuse any semblance of fiscal restraint as politicians launch 2020 campaigns on the laurels of unpaid-for tax cuts or promises of unprecedented massive spending initiatives.
But even more consequentially, it’s an enormous gamble on behalf of young Americans whose futures are threatened by politicians and their enablers that want to pull resources into the present and push risk and costs into the future. It’s even implicit in Furman and Summer’s writing, when they say that we should “tolerate large and growing deficits without making a major effort to reduce them—at least for the foreseeable future.”
While they don’t define “foreseeable,” if you’re under the age of 40 they are essentially saying that the buck will eventually stop with us.
The premise of their argument is true. Interest rates have stayed low which has shielded the government from interest expenses commensurate with the substantial debt buildup. It’s one thing to predict the best possible outcome of continually low interest rates based on secular stagnation or other demographic-based theories. It’s another entirely to advocate for basing our nation’s fiscal policy on this best-case scenario. It would be like, say, staking our entire housing finance system on the prediction that housing prices can’t go down.
Market based interest rates are not guaranteed to stay low – even if they stay low for years doesn’t mean they’ll stay low for decades. The cost implications could come quickly – as about two-thirds of our treasuries have maturities that are less than five years.
The more debt that the federal government accrues – the more disruptive the eventually higher interest rates will be. A single percentage point increase in interest rates will add $1.8 trillion in interest expenses over the decade. The Congressional Budget Office (CBO) already projects that annual interest costs will rise to $928 billion 10 years from now – higher than defense spending ($771 billion), Medicaid ($702 billion), and all non-defense discretionary programs combined ($759 billion).
This debt binge means younger Americans who still have their peak earning years ahead of them will see more of their tax dollars being directed towards covering the costs of unrestrained spending and promise of prior generations rather then investments in themselves. To illustrate this problem, the Steuerle-Roeper Index of Fiscal Democracy measures the percentage of revenues left over after payments on permanent programs (i.e mandatory spending – predominantly on Social Security, Medicare and Medicaid) and interest payments on the debt. In 1967, 60 percent of federal receipts remained after mandatory and interest spending. Only 20 percent remain today and that will fall to zero in a decade.
Eugene Steuerle’s index shows that “future generations will have no additional revenues to finance their own new priorities, and they will actually have to raise new revenues or cut other spending just to finance the expected growth in existing programs.”
The deficit detente argument that there is “more room” to add debt is self-evidently true since debt growth has not caused a disaster yet. Nobody knows how much debt will cause a marked economic slowdown or fiscal crisis. Until we reach that point, it will be impossible to refute the argument that the government “has more room” for additional borrowing.
Even Furman and Summers admit that “debt cannot be allowed to grow forever.” Yet, under current policies – not to mention wishes from both parties to add more tax cuts or spending initiatives to the tab – our path is already one of forever growing debt.
To acknowledge this problem while trying to postpone any meaningful actions to address it is to say let’s live for the moment and let future generations fend for themselves.
This is the crux of Golden Corral Economics. It’s great if you’re a boomer. It’s a disaster if you’re a younger American that will get stuck with the consequences somewhere beyond that “foreseeable” future.
