Cato adjunct scholar John Cochrane has written a great piece on “national debt denial,” which I recommend reading in full. In it, he punctures the intellectual leap that many commentators make from saying “borrowing is currently cheap” to implying “the national debt doesn’t matter.”
Few are suggesting drastic changes in policy to reduce borrowing while in the middle of a pandemic. But two recent reports highlight the longer‐term debt pressures we were sailing into even before this crisis hit.
First, my colleague Jeff Miron has updated his work on the U.S. long‐term fiscal imbalance, re‐iterating that the federal public finances are on an unsustainable path absent major reform to entitlement programs, such as Social Security and Medicare. Historically, many governments have inflated away high debt burdens, but that is much more difficult when the promises driving the debt are inflation‐proofed or else real demands for services, such as healthcare. The COVID-19 crisis, of course, worsens the debt level from which all this projected borrowing will be added.
The CBO’s most recent report, meanwhile, puts its own projection into a useful historical context (my emphasis):
The Congress faces an array of policy choices as it confronts a daunting budgetary situation. At 14.9 percent of gross domestic product (GDP), the deficit in 2020 was the largest it has been since the end of World War II. Much of that deficit stemmed from the 2020 coronavirus pandemic and the government’s actions in response—but the projected deficit was large by historical standards ($1.1 trillion, or 4.9 percent of GDP) even before the disruption caused by the pandemic…
CBO projects that if current laws governing taxes and spending generally remained unchanged, federal debt held by the public would first exceed 100 percent of gross domestic product (GDP) in 2021 and would reach 107 percent of GDP, its highest level in the nation’s history, by 2023. Debt would continue to increase in most years thereafter, reaching 195 percent of GDP by 2050. 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.
In other words, even after our emergency COVID-19 borrowing drops away, the current trajectory is for federal debt to near‐double relative to the size of the economy in the next 30 years because of existing laws and promises. For context: that projected 195 percent debt‐to‐GDP ratio in 2050 would be a debt level 84 percent higher than at the height of World War II, with not even the prospects of drastic expenditure cutbacks associated with demobilization to come.
As Cochrane writes, it is some gamble to just expect you can go on racking up debt like this, year on year, as well as doing vast bailouts every time a recession hits, without interest rates rising significantly, some eventual debt crisis, or a burst of damaging inflation. And that means deficit reduction will likely one day come anyway: whether in the form of more modest adjustments to the entitlement programs to reduce the debt trajectory or else the sudden necessity of sharp austerity once a crisis materializes.
One person who understands this appears to be Joe Biden’s Treasury Secretary pick Janet Yellen. She is reported to have told a Bipartisan Policy Center meeting earlier this year that “The U.S. debt path is completely unsustainable under current tax and spending plans,” and that it is “something that most people don’t understand and I see very little evidence of concern about it.”
We are concerned, Secretary‐Designate Yellen. Our recent Cato book, A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis, sets out the scale of the challenge and what might be done about it. Chris Edwards is a font of ideas on what federal spending could be cut to at least get closer to balancing the books, while Jeff’s work shows that, ultimately, it’s entitlement programs that require reform. I’ve written about how well‐designed fiscal rules could help frame public spending decisions too.
Politicians will only act on the debt, however, when there is a public demand to do so. The national debt is still a problem. Spread the word.
This article first appeared at the Cato Institute.