Deficits

America's Long-Term Debt Crisis Is Now a Short-Term Problem

Even in a healthy economy, rising debt and deficits posed challenges. The current crisis has magnified those problems.

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sfphotosfour575747 | SIPA/Newscom
(SIPA/Newscom)

When the Congressional Budget Office (CBO) examined the nation's long-term fiscal state last year, it offered this dour assessment: Federal debt levels were on track to reach their highest levels since shortly after World War II. On the current trajectory, "growing budget deficits would boost federal debt drastically over the next 30 years," pushing debt to levels that were "the highest in the nation's history by far." Interest payments were set to spike, tripling over the next several decades, and exceeding the total amount of all discretionary spending. Over time, debt service would essentially become its own massive federal program.

Even under favorable scenarios, in which productivity growth remained steady and interest rates remained low, debt levels would continue to rise and rise. "The prospect of such high and rising debt poses substantial risks for the nation and presents policymakers with significant challenges." Among the risks and challenges: "High debt might cause policymakers to feel restrained from implementing deficit-financed fiscal policy to respond to unforeseen events." Here is my thinking face emoji.

What the nonpartisan congressional budget analysts were saying, in their own carefully antiseptic language, was that even if things went pretty well for the economy, the continued growth of federal debt was going to be a big problem. A crisis was brewing, perhaps not immediately, but in the long term.

You may have noticed: Things have not gone well.

As COVID-19 spreads, the American economy is in the midst of the largest freefall in at least a generation, perhaps the most devastating since the Great Depression. Joblessness is at record highs, and financial analysts are predicting that the economy will end up shrinking by as much as 40 percent during the second quarter this year. A sharp drop in health care spending, as people delay elective surgeries and other non-emergency care, has alone managed to trim several points from the gross domestic product. No one has any clear sense of how or when this will end. 

As the economy has tanked, Congress has responded with a series of aid packages totaling nearly $3 trillion, all of which have been deficit-financed. This year's budget deficit is expected to come in somewhere around $4 trillion, nearly the size of last year's entire federal budget. In April, the U.S. posted its highest monthly budget deficit ever, at $737.9 billion. In 2016, the final year of Barack Obama's presidency, the annual deficit was $585 billion. In a single 30 day period, the U.S. government ran a bigger budget deficit than any one year outside of the Great Recession and its aftermath. 

And this year isn't over: Yesterday, Democrats unveiled a new $3 trillion relief package, offering billions in bailout funds to state budgets and the post office, along with another round of stimulus checks for most households. Progressives complained the bill wasn't large enough. 

The bill isn't expected to pass, however, at least not in its current form. And the reason why is something the CBO warned about: High debt levels appear to be causing policy makers "to feel restrained from implementing deficit-financed fiscal policy to respond to unforeseen events." Republicans in both Congress and the White House are balking at the price tag, in part because it would come on top of a debt and deficit outlook that was already worrisome. 

I have criticized the major fiscal stimulus bills under both the Bush and Obama administrations. But there is at least a case to be made that this crisis, which is different in both scale and kind from previous economic upheavals, is one that actually justifies some amount of emergency deficit spending, if not the particular bills that Congress has passed: When governments are forcing businesses to close in response to an unforeseeable exogenous event, as well as forcing individuals to stay home from work, some form of recompense is probably justified. It is notable that the Committee for a Responsible Federal Budget, one of the organizations most single-mindedly focused on national debt reduction, has backed deficit spending in this instance. 

Yet the relief effort is running up against legislative skepticism—a political constraint imposed by the high debt and deficits that were already locked in before the crisis began. 

I don't mean to endorse the House Democrats' bill, which is at least in part an effort to use the current crisis to push the party's pre-crisis priorities. And there are plenty of legitimate criticisms of the relief legislation that has already been passed; the contradictory design and dysfunctional implementation of the previous relief bills should give anyone wishing for trillions more real pause. 

There's blame to go around for the fiscal mess: Republicans shoulder much of the responsibility for the preexisting conditions of the nation's fiscal health, although Democrats have certainly contributed plenty over the years as well. But partisan blame is, at the moment, somewhat beside the point. 

It is certainly possible that additional deficit-financed relief legislation will pass in the coming months. But the current challenge is real: Decades of rising debt and deficits, even under thriving economic scenarios where persistently high deficit levels are unjustified, have left lawmakers across the aisle less willing or able to respond, exactly as budget-watchers have predicted. The debt is not just a drag on the economy. It's a burden on crisis response, a limitation on the government's ability to take action in a time of need. 

For years, the risks associated with long-term fiscal imbalances have mostly been seen as potential threats down the road rather than real, immediate challenges. But those risks have now materialized dramatically as short-term challenges. The long-term problems are exacerbating our near-term crisis.