The most recent fiscal forecast from the Congressional Budget Office sees a historic amount of debt in America’s future. Moving past the impact of the coronavirus pandemic over the next few years, the CBO sees annual federal budget deficits increasing from 4 percent of GDP in 2026 to 13 percent by 2050. That would be larger in every year than the average deficit of 3 percent of GDP over the past 50 years. The national debt would be a lot bigger, too. CBO projects that by the end of 2020, federal debt held by the public is projected to equal 98 percent of GDP, 107 percent (“the highest amount in the nation’s history,” the CBO adds) in 2023, and 195 percent of GDP by 2050.
The CBO concludes: “High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.”
Source: Congressional Budget Office
Now, all those numbers assume current laws governing taxes and spending stay the same. But the current Democratic and Republican presidential candidates have taxing and spending plans that, if implemented, would alter that status quo. Here is the “central estimate” calculation from the Committee for a Responsible Federal Budget: “… we find President Donald Trump’s campaign plan would increase the debt by $4.95 trillion over ten years and former Vice President Biden’s plan would increase the debt by $5.60 trillion. Debt would rise from 98 percent of Gross Domestic Product (GDP) today to 125 percent by 2030 under President Trump and 128 percent under Vice President Biden, compared to 109 percent under current law.”
So more debt and bigger deficits. But how much is too much? It seems the general consensus these days is that the United States has plenty of what economists call “fiscal space.” But surely there is not unlimited fiscal space, even for the world’s leading economy that runs the world’s most important currency. So on this subject, let me highlight the thoughts of two great economists that I‘ve chatted with on my podcast. First, Glenn Hubbard from last month:
Pethokoukis: It seems like it is very easy to work on economic policy these days, because you can come up with great ideas and you don’t have to explain how you’ll pay for them. There seems to be very little interest in debts and deficits and those kinds of fiscal constraints. Do you still care about the debts and deficits, and if you do, do you feel like you’re in a small group that is shrinking day by day?
Hubbard: I do care, and I understand that I’m in a very small group, but I know that eventually, the worm will turn, and people will focus on this — not because I’m “right” but because math is math. You can argue about politics, you can even argue about economics, but you can’t argue about arithmetic, and we are on a fiscally unsustainable path.
Now, that doesn’t mean that the crisis is tomorrow, and it doesn’t even mean that we couldn’t make the additional public investment to raise productivity. We could do those things, but the notion that we could start all new social programs or have massive spending without thinking about the future and have the Fed finance it is a fool’s errand. I worry that nobody in the political process is standing for this.
Normally in an election year, we would see some tension about this, but we’re not. One side says, “The deficits don’t matter, and we have one particular idea.” Another side says “Deficits don’t matter, and we have another idea.” We do not see any budget constraints for the people. It’s like the old days when menus in restaurants sometimes didn’t have prices on them. It’s easy to pick things when you don’t know how much they cost, and I worry the American people face that.
The longer we wait to make the choices we need to make, the more likely it is that there could be real damage by cutting support for other things like research or education or national defense, cutting support that seniors and others have come to expect, or raising taxes to the point where we can’t have growth. I see these choices as very unappealing if we don’t act.
And here is Kenneth Rogoff, back in 2016 when the debt-to-GDP ratio was 76 percent:
Pethokoukis: Do you worry about the current levels of debt?
Rogoff: Well, obviously one question is at what horizon are we borrowing? So if you’re borrowing at 30 years, you can certainly carry — it’s a lot less risky than if you’re doing all quantitative easing and you’re borrowing at overnight interest rates when those can change on you very suddenly. Anyone who thinks we’re never going to have inflation again, there’s no risk that interest rates will go up, that’s nuts. We’re not — the United States is not a hedge fund and not just saying, well, there’s a 5 percent chance we’ll go bankrupt, to the 95 percent chance we’ll make money. We have to balance those risks and think about not just the level of debt, but what is the whole maturity structure of debt, what’s the profile. It’s pretty short at the moment after all this period of quantitative easing.
Clearly, the US is in a position to take on more debt, and I think if you do it on infrastructure spending, improving education, it would be a good idea. On the other hand, if you say, “You know, we’re never growing again, we’re in secular stagnation, so let’s just have a big party now and we’ll worry about it later,” that’s kind of crazy.
If I were to tell you that the US debt ratio in 2040 had doubled, was 150 percent of GDP, if that were the only data point that you knew, would you, with any confidence, be able to tell me anything else about the economy if you knew that one statistic?
No. I wouldn’t because we also have the unfunded pension liabilities that have very similar properties to debt. We’d need to know the maturity structure of debt. You need to know a lot of things. The United States is clearly in a much better position than countries like Italy, even France or Greece. The United States is still the world currency and can do much more. But it’s a question of the profile of risk. You say a lot of people on the left favor having more debt. I guarantee you if the right is in power and they’re doing things that create more debt, the same people on the left would be saying that is terrible.
I’ve heard economists say that perhaps in the future we’ll be like the bank of Medicis in Renaissance Italy where people will just want to hold US bonds as a place to put their money. They could care less that the interest rates are low or negative. They’re just looking for a safe haven in a dangerous world and, therefore, rates will be low forever, and as long as we’re not doing crazy things with the money, now is the time just to be spending what we need to spend. [Are those who worry about CBO debt forecasts] missing the new environment we’re in?
Are we really obsessing about it? I mean, when Mitt Romney ran in 2012, he was going to have a huge increase in debt on what Republicans wanted to spend it on. Trump is going to have a huge increase in debt on what he wants to spend it on. The Democrats are going to have a huge increase in debt on what they want to spend it on. And a lot of this conversation about — you know, worrying about debt is actually the side that’s not in power complains about it because they want to be able to spend the money, they want to be able the way they want to spend it. So I tend to think that that caricature that somebody’s worried about debt tends to sort of miss where the real debate is.
I think to the extent we’re spending it on pre-school, early childhood education, to the extent we’re spending it on useful infrastructure, that’s an investment and it pays off and you can carry it better. And on the other hand, to the extent that you really believe, as many on the left do, that we’re not growing anymore and we should just consume as much as possible now in sort of pure consumption, that’s a harder case to make. And, again, you have to look at the maturity profile of debt and not just at the level of debt. It’s a risk management question. That’s the core of the issue.