Debt and Deficits

Deficit Politics May Have Gone Away, but Debt and Deficits Are Worse Than Ever

The federal budget situation used to be an emergency. What happened?

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For most of the Obama era, the federal deficit—and, by extension, the debt—was a crisis.

This was a bipartisan belief, held, or at least paid respectful lip service, by the Tea Party radicals and top administration aides as well as by President Obama himself. Hence the battles over the debt limit; the imposition of sequestration cuts that, fully implemented, were intended to reduce spending by more than $1 trillion over a decade; the concurrent increase in tax rates on high earners; the creation of the National Commission on Fiscal Responsibility and Reform, better known as the Supercommittee; and the Simpson-Bowles debt-reduction proposal to which it led.

In the end, that plan was rejected by party leaders on both sides. But the idea, that trillion dollar deficits and the pile-up of debt they incur represented a problem, remained alive and powerful to the end. Even President Trump campaigned on (fanciful and mostly incoherent) promises to eliminate the federal debt. The federal budget was an emergency or at least a looming threat. Something had to be done.

But two and a half years into the Trump administration, neither party acts as if there's a crisis.

On the Republican side, the party's most notable legislative accomplishment was a deficit-increasing tax-cut bill that reduced revenues without offsetting spending cuts. At least for a while, Trump appeared to be under the false impression that federal debt could be paid down with tariff revenue. Trump's all-purpose acting henchman, the one-time fiscal hawk Mick Mulvaney, has argued in favor of new deficits.

Amongst Democrats, the GOP's abandonment of deficit politics has freed the party's progressives to propose massive spending increases, while elevating economic theories that excuse, or even encourage, a deficits-forever approach to budgeting.

The budget process itself is deeply broken, leading to last minute, quasi-temporary spending deals that come together only because Republicans want to secure more funding for the military while Democrats obtain more funding for domestic programs. Medicare and Social Security remain the largest long-term drivers of the debt, yet the project of entitlement reform looks effectively dead.

The 2020 presidential campaign is in full swing, yet debt and deficits have barely been mentioned. Relatedly, public concern about the issue has dwindled since 2013. In just a few years, American politics has been overtaken by a free-spending sense that debt and deficits just. Don't. Matter.

And yet the underlying fiscal situation hasn't changed. If anything, it has become worse. The budget is now on a trajectory toward trillion dollar deficits, and the total federal debt has soared past $21 trillion. And old-age entitlements are rapidly nearing the point of fiscal failure.

Consider Social Security. Earlier this year, the program's trustees projected that it would be insolvent—unable to pay all of its bills—in just 16 years. Starting next year, the program will begin tapping its trust fund assets in order to pay its full benefits. Eventually, that fund, which itself is a kind of accounting fiction, will be gone, and the program will only be able to pay out a portion of its benefits.

Medicare's finances are, in some ways, in even more dire shape: Although Social Security's shortfall is larger, Medicare's main trust fund is expected to reach insolvency in 2026, at which point it will be able to pay just 89 percent of its bills. That's just two presidential elections away, and yet nearly all of the current discussion about Medicare is about whether and how to expand it.

This is the new free-lunchism, and it is driven almost entirely by the politics of convenience and short-term thinking: Voters want more benefits and more spending but not the broad middle-class tax hikes that other countries rely on to pay for those benefits, and politicians across the aisle have responded by offering them exactly the combination they want, with predictable results. There is a prevailing sense amongst both voters and lawmakers that there is little cost to doing so, at least for now. After all, the debt-driven calamities warned about during the Obama era never came to pass. So why worry now?

In part, this is a misunderstanding of how debt crises work. Typically they don't announce themselves years in advance and provide the public and the political class time to prepare. By the time a crisis arrives, it is, almost definitionally, already too late.

And to the extent debt crises do announce themselves, it's unlikely to be through anything dramatic. Instead, the early warnings are likely to come through boring and somewhat uncertain projections from actuaries and government economic offices, think tanks that seem to always warn of an impending debt crisis, and deficit-hawk politicians who gripe that no one ever listens to them. The signs and portents, in other words, would look something like what we're already seeing now.

The current lack of concern about deficits is also partially a result of a re-thinking by some economists, especially on the left and center-left, about the relative importance of deficits; maybe deficits will matter at some point, this line of thinking goes, but not as much as previously thought, and certainly not at present.

Intentionally or not, this line of thinking has given the political class, which rarely considers economic ideas with much nuance, a license to make ever-more extravagant and expensive promises. It has resulted in a calculation, probably correct, that offering voters more—and more and more and more—without the pain of tax hikes, is a path to easy victory with few consequences. Which by all appearances, it is, and will be…right up until it isn't.

It is possible, I suppose, that this cavalier approach to public finance will work out, more or less, that we'll muddle through, as we usually have, and that the recklessness of the political class will prove merely irresponsible in the usual way, rather than fully calamitous.

And yet. To believe that we should simply respond to the current fiscal situation with a collective shrug requires a belief not only that current levels of debt and deficits don't matter, but that the inevitable future expansion of the fiscal gap won't matter either. 

Because one thing you can be certain of is that if today's fiscal frivolity does not produce immediate dire consequences, then the next generation of politicians, Republican and Democrat alike, will push the envelope just a little bit further, and a little bit further after that, and so on and so forth, rather than settling in some comfortable stopping point where the country's finances are messy but mostly hang together.

Sustaining this casual attitude toward fiscal looseness thus requires believing that there is essentially no limit, no meaningful upper bound, to the amount of debt that the federal budget can sustain, an idea that even many of today's more sophisticated debt-doesn't-matter boosters don't subscribe to. Alternatively, it requires a high degree of confidence that our nation's political class will more or less responsibly take our national ledger right up to the brink but no further, finding the precise last moment in which to exercise fiscal restrain. If you believe this, I would gently suggest you acquaint yourself with some politicians.

Otherwise, you have to worry, at least a little, that today's trajectory is toward crisis, if not now, if not at current debt levels, then at some future date we'll only discover when it's too late to prevent, when the consequences can't be avoided. And that worry should be increased a little more by the possibility that today's free-lunchism is not only increasing the likelihood of an eventual crisis, but making it harder to solve, if and when it does arrive, by seeding amongst voters the idea that hard choices won't ever be necessary. It is making the already challenging project of achieving public consensus harder still. 

So yes, the predicted crisis may not have arrived quite yet. It may even hold off for a while longer. But the nature of politics means it draws ever closer, and ignoring the issue, as we are now, only makes it worse.