Debt Denialists
Democrats and Republicans fiddle while the balance sheet burns.
It was eight hours before the biggest media opportunity any Libertarian Party candidate had had in decades, and Gary Johnson was in a New York hotel room talking on the phone with Harvard economist Jeffrey Miron about the nuts and bolts of entitlement reform. "When it comes to Social Security," Johnson told his senior economic advisor as they rehearsed for a June 22 CNN town hall that would end up being viewed in more than 900,000 households, "I'm mimicking the lines from four years ago regarding raising the retirement age, fair means-testing, being able to self-direct as many funds as Congress would authorize.…"
After wondering aloud whether even these reforms would prevent the Social Security Trust Fund from going "bust," Johnson arrived at his bottom line: The system as currently constituted is fiscally unsustainable. "That's the reality," he said, "and, you know, you can't run for this office and not speak that truth, in my opinion."
Johnson, bless his fiscally responsible heart, was confusing can't with shouldn't. Because one of the most ominous and overlooked developments of the head-spinning 2016 presidential election has been that the winning candidates were precisely the ones who steadfastly refused to speak the truth about how rapidly old-age entitlements are scarfing up the pie of federal spending. In fiscal year 2016, $2.47 trillion of the federal government's $3.66 trillion in non-interest expenses came from the "mandatory spending" categories of Social Security, Medicare, and Medicaid. Within a decade, according to the Congressional Budget Office (CBO), those figures are projected to grow to $4.14 trillion out of $5.7 trillion.
In its latest Long-Term Budget Outlook, released on July 12, the CBO concluded that even near-term projections show publicly held debt (which is the national debt minus the debt held by government institutions) "growing larger in relation to the economy than ever recorded in U.S. history," from a current debt-to-gross domestic product (GDP) ratio of 75 percent (up from 39 percent as recently as 2008), to 86 percent in 2026 (higher than it has been since World War II), and then 141 percent in 2046 (wheeee!). Debt service alone is on pace to become the third-largest federal spending category during the next president's first term.
"Large and growing federal debt over the coming decades would hurt the economy and constrain future budget policy," the CBO warned. "The amount of debt that is projected…would reduce national saving and income in the long term; increase the government's interest costs, putting more pressure on the rest of the budget; limit lawmakers' ability to respond to unforeseen events; and increase the likelihood of a fiscal crisis." That almost sounds like something worth mentioning during a presidential campaign!
Yet instead of addressing that reality, Donald Trump has campaigned as the Republican who would protect rather than tweak entitlements. "We're going to save your Social Security without killing it like so many people want to do," he said at a June 18 rally in Phoenix. "And your Medicare." How will the GOP nominee overcome the cruel logic of actuarial tables, which show that the ratio of workers paying into the system to retirees receiving transfers continues to plunge from 16:1 back when Social Security was launched to less than 3:1 now? Through a combination of "dynamic" economic growth and an always-vague promise to root out "waste, fraud, and abuse." As Steve Bell of the Bipartisan Policy Center told The Wall Street Journal in June, "Any notion of waste, fraud and abuse meeting our fiscal needs remains…silliness." Not just silly, but sad! "Trump's comments are just another kick in the stomach to all of us who have worked for more than 30 years for solvency for Social Security."
The Democrats, if anything, have been worse. Insurgent runner-up Bernie Sanders promised to expand, not contract, both Social Security and Medicare, and after long negotiations he helped push those planks into the Democratic platform, widely hailed as the "most progressive" in party history. It is now Hillary Clinton's official position to hike monthly Social Security benefits, boost cost-of-living increases, and reduce the age of Medicare eligibility, at least in terms of being able to "buy in" to the program, from 65 to 55. This at a time when mandatory spending plus debt service already accounts for around 70 cents of each federal dollar, in an era of historically low interest rates.
"After all," Clinton said in one of her biggest applause lines at the Democratic National Convention (DNC) on July 28, "when there are no ceilings, the sky's the limit!" Though the Democratic nominee was referring to glass ceilings for women, she may as well have been talking about the nation's debt ceiling, which, after being used as leverage to keep federal spending growth in check from 2011 to 2014, was quietly waved out of existence in October 2015 by the Republican-controlled Congress until after the 2016 election. Fiscal rectitude as even a rhetorical feint among major-party politicians has gone the way of the Whigs. The sky's the limit on how irresponsible we can get from here.
But don't tell that to Gary Johnson just yet. While his June 22 CNN performance was widely judged to be more face-plant than break-out, the Libertarian's response to naming "the greatest challenge facing our country's next president" eventually meandered near the vicinity of the bullseye: "I think it is the fact that government tries to accomplish too much, and in doing that, it taxes too much, and so we have some real issues with entitlements that—look, nobody is addressing the fact that there does need to be reform to Social Security, there does need to be reform to Medicaid and Medicare," Johnson said. "And that's not to say that we're not going to provide safety nets and provide services that people do need. But look, if we're going to bury our heads in the sand over these issues, that's not what we're about. There's a truth here. These issues have to be addressed. It's an economic catastrophe. And we'll address them."
At press time, Johnson's lonely insistence on being a fiscal realist was coinciding with the best-ever presidential polling results for a Libertarian Party candidate—consistently at around 8 or 9 percent. Meanwhile, the unprecedented enthusiasm on both sides of the aisle for protecting and expanding the welfare state was accompanied by the weakest major-party polling support in a quarter-century.
Yet the odds are stacked overwhelmingly in the statists' favor. Unless an unpredictable political year coughs up the mother of all Black Swan events, June and July of 2016 could go down in history as the period when America's 19th century political parties finally and decisively waved the white flag on fiscal responsibility, making inevitable what budget analysts and presidents from both parties over the past two decades have been desperately seeking to prevent.
Don't Say We Didn't Tell You
Between 1997 and 2013, American presidents delivered 15 State of the Union addresses and two addresses by presidents-elect to joint sessions of Congress. All 17 speeches addressed the need for long-term entitlement reform.
"Today," Bill Clinton declared in 1999, "Social Security is strong. But by 2013, payroll taxes will no longer be sufficient to cover monthly payments. By 2032, the Trust Fund will be exhausted and Social Security will be unable to pay the full benefits older Americans have been promised."
"Seven years from now," George W. Bush continued in 2001, "the Baby Boom generation will begin to claim Social Security benefits. Everyone in this chamber knows that Social Security is not prepared to fully fund their retirement. And we only have a couple of years to get prepared. Without reform, this country will one day awaken to a stark choice: either a drastic rise in payroll taxes or a radical cut in retirement benefits. There is a better way."
Barack Obama picked up in the same rhetorical place where Clinton and Bush left off. "We…still face the massive deficit we had when I took office," the president said in 2010. "More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.…Rather than fight the same tired battles that have dominated Washington for decades, it's time to try something new: Let's invest in our people without leaving them a mountain of debt."
Yet Obama, who as a candidate characterized President Bush's doubling of the national debt from $5 trillion to $10 trillion as "un-American," ended up presiding over a doubling of his own. And on June 1 of this year, as the debt clock ticked closer to the $20 trillion level, the president plunged the first of this season's many daggers into the heart of entitlement reform. "It is time we finally made Social Security more generous," Obama pronounced in an economic policy speech, "and increase the benefits so that today's retirees and future generations get the dignified retirement that they have earned." As economist Andrew Biggs put it the next day over at the American Enterprise Institute's website, "On Social Security, Bernie Sanders is now the leader of the Democratic party."
It Wasn't Supposed To Be This Way
Bill Clinton and then–House Speaker Newt Gingrich, those '90s sparring partners whose occasional teamwork produced some of the decade's best policy making (and also some of its worst), came to a secret agreement in October 1997 to push for Social Security reform. But just before Clinton was set to announce the resulting bipartisan initiative in his 1998 State of the Union Address, word splashed on the Drudge Report that a White House intern named Monica Lewinsky had had an affair with the president, throwing American politics into a year of turmoil. After Clinton's impeachment there were a few halfhearted suggestions on both sides of the aisle to spend budget surpluses on a Social Security–protecting "lockbox" (made famous in a Saturday Night Live send-up of Al Gore), but they went nowhere.
George W. Bush made his big retirement reform push in the 2005 State of the Union Address, vowing to spend his re-election mandate on overhauling Social Security so that younger workers could choose voluntary personal retirement accounts instead of sitting idly back and hoping the trust fund would still be solvent by the time they retired. The president's lips said "voluntary," but Democratic ears heard the hated word "privatization," and in a few short months not only was Bush's plan dead on arrival in a Republican-led Congress but the long-beleaguered opposition had a rallying point to take back the House of Representatives for the first time since the Gingrich revolution of 1994.
This proved a watershed moment for the modern Democratic Party. Bill Clinton, a self-styled "New Democrat," had championed trade agreements, entitlement reform, and the application of U.S. military power. But now Democrats had retaken Congress by declaring their blanket opposition to Bush's trade, privatization, and war agenda. No more "triangulating" between the progressive base and the moderate political center; the newly successful Democrats were tapping into their old, pre-Clinton values and policy commitments.
One of the first politicians to fully grasp and take advantage of the party's leftward shift was a freshman U.S. senator from Chicago. Barack Obama battered the initially prohibitive presidential favorite Hillary Clinton from her left flank on both war and trade, promising that ripping up Bill Clinton's North American Free Trade Agreement (NAFTA) would be "one of the first things I'll do as president." Hillary at this point quickly switched from a qualified free-trade proponent to a full-on skeptic, calling for a "time out" on future international agreements. On entitlements, both candidates campaigned on fulfilling the generations-old progressive dream of providing health care for all (a goal that Democrats had mostly shied away from after Hillarycare was defeated in 1994), but Obama again ran to Clinton's left when it came to his main idea for addressing the Social Security imbalance: lifting the income cap on payroll taxes. "I don't want to raise taxes on anybody," Clinton countered back then.
The 2008 Democratic National Convention was a remarkable exercise in bragging about Bill Clinton's economic results while repudiating most of the policies that helped produce them. Yet the party's leftward heave had only just begun. Barack Obama, Hillary Clinton, and other top politicians still hammered away back then at the country's mounting pile of debt, and they still expressed preference for that old go-to of long-term entitlement reform: the bipartisan commission.
'We're Now at the End of the Road'
American politics, this year more than ever, is a collective exercise in short-term memory loss. Distracted by populist authoritarians shouting collectivist insults or by machine politicians repeating lies about personal accountability, voters quickly forget or straight-up ignore massive policy shifts happening right in front of their eyes. So it is with the bipartisan approach toward debt, deficits, and long-term fiscal management.
From November 2008 to November 2014, these topics—along with the exacerbating, intertwined pig-in-a-python that was the financial crisis and subsequent bailouts and stimuli—dominated national politics. After the alleged party of fiscal conservatism retook the Senate, these subjects largely vanished. If the country is ever going to head back in the direction of long-term fiscal sanity, fighting back against this amnesia will be key. Obama's June 1 call this year to expand entitlements heedless of long-term sustainability should thus be recognized as one of the biggest cases of policy whiplash in modern times.
In January 2009, before being sworn into office, Obama told The Washington Post that even in the teeth of the financial crisis and economic downturn, he would seek to forge a grand bargain with Republicans and Democrats on entitlement reform. "There are going to be some very difficult choices, and issues of sacrifice and responsibility and duty are going to come in," he said, "because what we have done is kicked this can down the road. We're now at the end of the road. And we are not in a position to kick it any further.…We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."
So much red ink has washed over the land since then that it's hard to remember, but candidate Obama had campaigned on enacting a "net spending cut." He repeatedly vowed no new taxes—not even "one dime"!—for any Americans making less than $250,000 a year. Even his signature legislative achievement, the Patient Protection and Affordable Care Act, was sold consistently as a way to get long-term spending and debt under control. All three of those promises, it turns out, were bunkum, but they pointed to a set of perceived political constraints.
Democrats may have rejected Bill Clinton's economics, but they still styled themselves, contra George W. Bush, as the party of fiscal responsibility—so much so that Obama's first budget was given the pompous title A New Era of Responsibility: Renewing America's Promise. The only problem: That very same budget as submitted carried a deficit of $1.17 trillion. Democrats were starting the Obama era by divorcing fiscal reality from rhetoric. Within a few years, the rhetoric would follow downhill as well.
But not before the president fulfilled a campaign promise he shared with Hillary Clinton. "That's why I've called for a bipartisan fiscal commission," he said in his 2010 State of the Union address. "This can't be one of those Washington gimmicks that lets us pretend we solve a problem. The commission will have to provide a specific set of solutions by a certain deadline."
Co-chaired by former Republican Sen. Alan Simpson and former Democratic White House chief of staff Erskine Bowles, the National Commission on Fiscal Responsibility and Reform came into being in April 2010 and issued its recommendations that December, a month after Democrats were driven out of the House of Representatives by a Tea Party wave of conservative revulsion at federal government overreach and overspending. The fraught partisan politics of the moment haunted the commission throughout: Only 11 of the 18 members, short of the 14 required to send their final report in bill form to Congress, ended up endorsing the recommendations.
The rough calculus of this proposed grand bargain was $2 trillion in future spending cuts and $1 trillion in future tax increases, combining to stem the rapid growth in federal debt by 2014 and then begin to reverse it. Social Security benefit growth would be slowed, the retirement age would be raised, and Medicare increases would be snipped. Personal and corporate taxes would be lowered, but tax breaks would be phased out. Discretionary spending caps would be put in place.
On the right, critics such as Americans for Tax Reform President Grover Norquist opposed the plan because it raised taxes on net. On the left, progressives such as New York Times columnist Paul Krugman—who called the deal "terrible"—criticized it for daring to raise the retirement age. But even in death, the Simpson-Bowles framework lived on, as the newly emboldened Republican House demanded some concessions from the White House in exchange for raising the federal debt ceiling in August 2011. The ensuing Budget Control Act forged into being a Joint Select Committee on Deficit Reduction, otherwise known as the "supercommittee," which was tasked with either agreeing on $1.5 trillion in spending cuts over the next decade or having across-the-board "sequestration" spending cuts imposed on January 1, 2013.
The supercommittee, too, proved unable to forward an agreement to Congress, leaving 2012 as a steady march to what became known as the "fiscal cliff" of New Year's Day. Having used the debt ceiling—the only point of Republican brinkmanship that broad majorities of Americans in recent years have favored leveraging—to force the issue on long-term fiscal reform, and then having that reform fail to coalesce, the GOP at least had to show for it some spending discipline for a few years.
Meanwhile, some Democrats still retained the muscle memory of talking about fiscal responsibility. In his speech to the 2012 Democratic National Convention, made famous for his crack that his was the party that favored basic budget "arithmetic," Bill Clinton both endorsed the Simpson-Bowles framework, and issued a warning across the bow of both parties:
"Now, let's talk about the debt," the former president said. "Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them. But it will become a big problem when the economy grows and interest rates start to rise. We've got to deal with this big long-term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we'd rather spend on education and health care and science and technology.…We've got to deal with it."
By 2016, both parties had given up trying.
Trump's Fantasia
Among the scores of colorful trial balloons Donald Trump has belched forth into the air this season was his suggestion in a May 2016 CNBC interview that when it comes to America's debt obligations, "There are times for us to refinance. We refinance debt with longer term. Because you know, we owe so much money…I could see long-term renegotiations, where we borrow long-term at very low rate."
Asked to clarify whether he was really suggesting renegotiating America's sovereign debt, Trump, who is famous in his business life for negotiating and lawyering his way out of financial obligation, said "I don't want to renegotiate the bonds. But I think you can do discounting, I think, you know, depending on where interest rates are, I think you can buy back. You can—I'm not talking about with a renegotiation, but you can buy back at discounts, you can do things with discounts.…I would refinance debt. I think we should refinance longer-term debt."
None of this makes much sense, and neither did his follow-up with The Wall Street Journal explaining that if the Treasury "can buy the debt back at good deals, you could buy it back in the market. And if rates go up, you'll always—you're always given that opportunity." The bad news for Trump is that these weren't even his craziest comments about America's fiscal situation this year.
"We've got to get rid of the $19 trillion in debt," Trump told The Washington Post's Bob Woodward in April. How long would it take to get to zero? "Well, I would say over a period of eight years," he said. Making the absurd claim even more nonsensical were the candidate's vows that he could accomplish this unprecedented pay-down simply by virtue of renegotiating trade deals. No taxes need be raised, he said, to come up with the extra $2.375 trillion per year.
Trump walked back the promise three weeks later, largely on the grounds that the federal government has some big-ticket spending items to accomplish, in addition to fulfilling his promises to protect entitlements. "I'd rather not be so aggressive," he told Fortune. "Don't forget: We have to rebuild the infrastructure of our country. We have to rebuild our military, which is being decimated by bad decisions. We have to do a lot of things." In August, he unveiled a plan to outspend even Hillary Clinton on infrastructure, throwing a half-trillion dollars at rebuilding bridges and highways and so forth.
Donald Trump's pronouncements on fiscal matters are, as a general rule, untethered to reality. On July 27, the independent, bipartisan Committee for a Responsible Federal Budget estimated that under Trump's announced plans thus far, the national debt would double over the next decade to $39.5 trillion. As Peter Suderman has observed at reason.com, the Republican nominee's "proposed Social Security reform would attempt to cover a $150 billion fiscal gap by cutting waste, fraud, and abuse—which only amounts to about $3 billion. Trump has also suggested that the government could save $300 billion through savings in a program that only spends $78 billion. It's total nonsense."
Hillary's Amnesia
Remember back in 2008, when candidate Hillary Clinton pushed back on Barack Obama's plan to raise payroll taxes on wealthier Americans by saying "I don't want to raise taxes on anybody"? In her 2016 DNC speech, Clinton vowed, among many other things, to expand Social Security, "pass the biggest investment in new, good-paying jobs since World War II," "make college tuition free for the middle class and debt-free for all," "liberate millions of people who already have student debt," and "help more people learn a skill or practice a trade and make a good living doing it." And how, pray tell, is the federal government going to pay for all this? "Here's how," she said. "Wall Street, corporations, and the super-rich are going to start paying their fair share of taxes." The sky's the limit, remember.
During the primary season, Clinton and her supporters fought back against the Sanders insurgency by pointing out, almost defensively, that the democratic socialist's various promises would add more than $1 trillion a year to the federal budget. But after feeling political pressure from Bernie's bad economic ideas—as opposed to his more salutary views on war, civil liberties, surveillance, and drugs—Clinton shrugged and adopted many of them as her own. Now the Democratic nominee opposes the Trans-Pacific Partnership agreement, supports a $15 federal minimum wage (albeit with more conditions than Bernie suggested), wants to create tuition-free higher education for the children of households that earn $125,000 a year or less, and no longer talks about any limiting factors in terms of cost, taxes, or debt. It's Trump's fantasia, only with more line items.
The same Committee for a Responsible Federal Budget that dinged Trump had unflattering things to say about Clinton. Under her plans, the group found, the national debt would increase from $19 trillion to $29 trillion over the next decade. Both candidates would maintain the federal government's current level of historically high annual spending as a ratio of GDP—from 22.1 percent today to either 22.5 percent (Trump) or 22.7 percent (Clinton). Traditionally, federal spending in the post–World War II era, regardless of wildly varying taxation schemes, has settled in around the 19 percent level. The Bush/Obama bailout/stimulus period from 2008 to 2009 was no one-off injection; it was a ratchet to a new level. And as widely predicted by libertarians and other economists at the time, the ensuing level of indebtedness has coincided with more-sluggish-than-projected economic growth.
The Last Man
The Republican Party, having made hay on deficits, debt ceilings, and federal spending from 2011 to 2014, quietly let all that lapse upon resuming bicameral control over Congress after the 2014 elections. Almost immediately, Senate Majority Leader Mitch McConnell (R–Ky.) announced that there would be no breath-holding brinkmanship, soon-to-be Speaker Paul Ryan (R–Wisc.) cut a deal with Democrats to lift the hated-by-both-parties sequestration caps, and away we went.
These GOP moves toward fiscal irresponsibility had two main effects. The first was to move the center of political attention away from the constant budget battles in the District of Columbia. No longer was Sen. Rand Paul (R–Ky.) a constant feature on the Sunday talk shows, explaining why this or that budgetary compromise was unacceptable, and thumping the tub for cuts in both entitlement and military spending. As a partial result, discussion of debt and deficits was largely absent in the long presidential primary season, even on the Republican side. It was mostly Paul, and—ironically, given his future strong support for Donald Trump—New Jersey Gov. Chris Christie who made long-term fiscal reform central to their campaigns. Both candidates soon flamed out.
The second effect of the Republican can-kicking was more predictable, albeit slower to manifest. On July 15, the White House announced that for the first time since Obama's first term, the annual budget deficit would rise, this time by more than $160 billion to $600 billion total. All competent forecasters show annual increases for as far as the eye can see. The president who came into office vowing a new era of responsibility has instead steered the country toward the precipice of disaster.
"If you want to know what keeps me up at night, more than anything," Sen. Jeff Flake (R–Ariz.) told reason in January, "it's waking up some morning and having the markets already decided that we're not going to buy your debt anymore, or we'll only buy it at a premium, and interest rates are going to have to go up. When that happens, then virtually all of our…non-defense discretionary spending goes just to service the debt. And then we are Japan."
At press time, Flake was one of a handful of GOP senators who had so far refused to endorse Donald Trump. "All I can say is he's not a good candidate for the Republican Party," he told Arizona's KJZZ in early August. "Somebody's got to push back, and somebody's got to say, 'This is not how responsible candidates act.'" And lest there be any doubt, "There's one sure thing," Flake told Politico days before that. "I don't want Hillary Clinton to be president."
Hmmm, so who's left to vote for?
Gary Johnson and his running mate, William Weld, were back on CNN for a second town hall August 3, this time with sharper knives aimed at Hillary Clinton's fundamental fiscal irresponsibility. "Was there anything that she didn't promise to anyone in her acceptance speech?" Johnson asked. "The two-party monopoly in Washington," Weld added, "has gotten to the point where it's kind of run out of gas."
This article originally appeared in print under the headline "Debt Denialists."
