Politicians’ views of deficits and debt tend to oscillate based on their current and likely governing responsibilities. When out of power, it is routine to denounce the recklessness of those making the decisions. When holding power, or expecting to do so soon, elected officials and their supporters don’t want fiscal concerns to stand in the way of their plans.
In recent years, Republicans have provided a textbook example of this pattern. The Tea Party candidates of 2010 railed against the high deficits of the Obama years. But after 2016, with the government fully under GOP control, Republicans made the problem worse. The tax cut of 2017 had many admirable provisions, but Republicans should have paired it with serious additional tax or spending reforms to narrow future deficits. In his recent State of the Union address, President Trump never mentioned the government’s deficits or debt.
Now it’s the Democrats’ turn to renounce fiscal sobriety. The party that just over a year ago condemned the Trump tax cuts as fiscally irresponsible is now rushing to embrace massive new federal obligations and debt, and the party’s leading economic thinkers are willingly providing cover for the about-face.
In an article published last month in Foreign Affairs, under the title “Who’s Afraid of Budget Deficits?,” Jason Furman, Chairman of the Council of Economic Advisors during the Obama administration, and Lawrence Summers, a former Secretary of the Treasury under President Clinton and a former advisor to President Obama as well, endorse setting aside fiscal concerns to make way for an agenda addressing “urgent social problems.”
The timing of this public advice is not accidental. Having won control of the House in the mid-term election, Democratic leaders will soon be under pressure to lay out their governing plans, including what to do (if anything) about today’s large and growing deficits.
More significantly, the Democratic party is now gearing up to take on President Trump in the 2020 campaign. After two years of the Trump presidency, the party’s core supporters are in no mood for deficit-cutting medicine. What they want are bold and expensive ideas.
Which brings us to Furman and Summers. These are two highly respected and experienced economists. What they say matters, in economic policy generally, but especially among Democratic policymakers. They are very deliberately signaling to the current and potential Democratic candidates for president that the party’s leading economic thinkers will defend campaign plans that ignore the government’s mounting fiscal problems, even after the unprecedented run-up in debt over the past decade.
Candidates always overpromise when looking for votes, but fiscal concerns can usually screen out truly outlandish giveaways. If deficit concerns are minimized, there will be nothing holding back the political impulse to create a new government program for every claimed social need. Even at this early stage, the current Democratic candidates for president are scrambling to outdo each other with expensive promises of federally-guaranteed jobs, middle class tax cuts, free college tuition, Medicare for All, and a Green New Deal. Expanded Social Security and Medicare benefits, free child care, and much more are surely on the way.
Furman and Summers do not endorse legislating higher deficits, but they would allow the higher deficits, and mounting debt, that are scheduled to occur under current law to go unaddressed. The Congressional Budget Office (CBO) projects government debt will grow from 78 percent of GDP today to over 150 percent of GDP in three decades. In 2008, government debt stood at 39 percent of GDP.
Instead of pursuing deficit reduction, Furman and Summers endorse “pay-as-you-go,” which requires higher taxes (or, in theory, spending cuts) to offset new spending initiatives. That shouldn’t be a problem for the current group of Democratic candidates, who seem likely to be comfortable claiming their spending plans could be financed with tax hikes on the rich. In early January, the new House Democratic majority re-introduced a “pay-as-you-go” requirement for legislation in a set of rules adopted for the current Congress.
It is certainly legitimate to suggest that elected leaders need not worry about the consequences of the federal government’s deteriorating fiscal outlook, if in fact that were the case. But Furman and Summers offer very little to support this point of view.
They note that federal debt has risen sharply as a percentage of GDP over the past two decades and yet real interest rates for 10-year Treasury notes have fallen significantly, from 4.3 percent in 2000 to 0.8 percent today. But a drop in real interest rates can be a function of many factors (the age profile of the population, global trends in consumption, savings, and investment patterns, etc.) beyond the absolute level of government debt. Higher levels of government debt, even with low real interest rates, still mean resources that might otherwise go to more productive uses will instead finance government-sponsored consumption.
Although not mentioned in the Furman-Summers article, the most serious recent re-examination of the macroeconomic risks of public debt has been developed by MIT economist Olivier Blanchard. He has observed that, so long as nominal GDP growth exceeds the nominal interest rate paid on public debt, all that is needed for a country to grow out of a debt problem is a primary budget surplus, defined as revenues in excess of non-interest spending. But, as my AEI colleague Desmond Lachman has pointed out, the U.S. does not have a primary budget surplus. Indeed, in 2018, the federal government ran a total budget deficit of 3.8 percent of GDP and a primary budget deficit of 2.2 percent of GDP.
CBO expects that, while the U.S.’s primary budget deficit will narrow somewhat in coming years, it will still be 1.4 percent of GDP in 2029. Over the longer term, as the population ages and entitlement spending grows, the primary deficit will widen rather than narrow, and reach an average of 3.0 percent of GDP annually over the period 2040 to 2049.
Blanchard’s analysis is essentially irrelevant to the U.S.’s current circumstances. The federal government doesn’t have a sustainable fiscal policy, and economic growth isn’t going to turn things around. Which is why following the Furman-Summers recommendation would be so risky for the long-term health of the economy.
It’s telling that Furman and Summers never argue that high levels of public debt aren’t damaging to an economy. They only argue that the costs of deficits and debt can sometimes be overstated, relative to the merits of more government spending on matters that would produce tangible economic returns.
Perhaps that is the case. But their recommendation won’t lead to a sober reassessment of the costs and benefits of taking on added public debt to pay for well-designed public investment programs. Rather, ambitious politicians will see it as a green light to promise voters all manner of new benefits at no cost to the average taxpayer. That’s dangerous because, at the moment, political leaders are nowhere close to paying for the smaller but still very expensive government that already exists.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.
