We Can't Borrow Our Way to Prosperity

With the general election now officially underway, it’s encouraging that presidential candidates Hillary Clinton and Donald Trump have begun a discussion about how best to grow the economy and ensure our long-term prosperity. Both candidates laid out their economic agendas last week, and it’s reassuring that reforming our dysfunctional tax system and increasing public investment seem to top the list of ideas for accelerating long-term economic growth. 

But calls to finance these initiatives by increasing the deficit — effectively tacking them onto the national credit card — are self-defeating. Without a plan to pay for new initiatives and address our long-term debt, the nation faces slower, not faster, economic growth. 

The national debt is currently three-fourths the size of the economy — more than at any time in our nation’s history (with the exception of the World War II era). And, according to the Congressional Budget Office (CBO), the government’s official score-keeping agency, debt is on track to double as a share of the economy by 2050. Assuming our creditors continue to allow these levels of debt, the CBO estimates that within three decades this will reduce average income by $4,000 per person compared to what it would be if debt were on a declining path. 

And yet we’re hearing calls for more borrowing. Earlier this summer, the Committee for a Responsible Federal Budget estimated that Mr. Trump’s policies would add $11.5 trillion to the debt over the next decade, largely as a result of his tax reform plan. (Although he now appears to be revising that plan.) He has also called for further deficit spending as “priming the pump.” Meanwhile, there have been calls on the left for Hillary Clinton to expand — and to deficit finance — her $275 billion infrastructure plan.

Some have pointed to today’s low-interest rates to buttress the argument that now’s the perfect time to invest in our future. And there is some truth to this.

But the bottom line is that any plan to increase spending or cut taxes on pro-growth activities would be strengthened by including ways to pay for it over the medium-term, thereby reducing our nation’s long-term debt burden. 

Just ask the CBO. They recently estimated the economic impact of increasing federal investment. According to their findings, $500 billion of new deficit-financed federal investments spread out over a decade would increase the size of the economy by about 0.007 percent over the first ten years, while $500 billion of investment fully paid for would double that level of economic growth. By 2035, the CBO estimates the fully paid-for investment would increase the size of the economy by 0.06 percent, while the deficit-financed investment would shrink the economy by 0.04 percent. 

Or ask the Joint Committee on Taxation. They found that while comprehensive revenue-neutral tax reform could increase the size of the long-run economy by about 1.5 percent, revenue-positive tax reform — even with a smaller reduction in tax rates — would increase it by close to 2 percent.

If federal debt wasn’t already on a path to increase by $10 trillion over the next decade, there might be a case for new borrowing. But, as a nation, we’ve too often been cavalier about borrowing when rates are both high and low, making tens of trillions of dollars in promises with no plans for how to pay them back. Given our past fiscal irresponsibility, no honest assessment of our nation’s balance sheet could conclude that what we need now is more borrowing.

The evidence is clear: Reducing our projected long-term debt will promote economic growth; increasing debt will slow that growth.

Today’s low interest rates do provide an opportunity: They buy us time to implement gradually much needed deficit reduction plans. Meanwhile, we can boost the economy by leading with pro-growth tax and spending reforms and enabling the pay-fors to follow as rates rise and the economy grows.

But low interest rates don’t get us off the hook. We must still address our massive and growing debt burden, particularly over the long run. There’s no excuse for punting this burden — and the slow economic growth that will accompany it — to the next generation.