In its annual budget update, the Congressional Budget Office projected yesterday that under current law the federal deficit is headed for $1 trillion by 2022. Assuming a more likely fiscal path—where Congress increases discretionary spending at the rate of inflation and extends provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are scheduled to expire-- it will reach that attention-grabbing level next year.
Perfectly timed with the release of those projections, two high-profile Democratic economists, Larry Summers and Jason Furman, argue that we really should not worry much about current deficits and high debt levels. Congress should not make fiscal matters worse, but it need not try very hard to make them better.
Over the next decade, CBO figures annual deficits will average 4.4 percent of Gross Domestic Product. Over the past half century, including the Great Recession and its immediate aftermath, deficits have averaged 2.9 percent of GDP.
Unlikely assumptions
The public debt, currently about $15.6 trillion, or 78 percent of GDP, will reach nearly $20 trillion, or more than 83 percent GDP, in 2022. By 2029, it will hit nearly 93 percent of GDP—the highest level since 1950.
And that assumes the unlikely prospect that Congress allows the TCJA’s individual income tax cuts to expire as scheduled after 2025 and freezes discretionary spending as required in the (routinely ignored) 2011 budget agreement. If lawmakers increase spending at the rate of inflation, they’ll add another $1.8 trillion to the debt. If Congress extends the TCJA’s individual tax cuts and “bonus” depreciation for businesses and repeals or further delays several unpopular taxes in the Affordable Care Act, they’ll add another $1.6 trillion. All that would require another $400 billion in debt service.
The effects of rising deficits are stunning. Overall, over the next decade, CBO projects the federal government will pay nearly $7.5 trillion in net interest, according its most likely fiscal scenario.
Spending on interest
Just five years from now, the federal government will spend more on only two programs, Social Security and Medicare, than it will pay in interest on the debt. It will be paying as much annually in interest as it spends for national defense.
In 10 years, it will be spending almost $160 billion more in interest than it will spend on defense. Today, about 40 percent of federal debt is held overseas, one-third of it by China and Japan.
CBO’s interest cost projections assume that 10-year Treasury bond rates continue to rise for the next year or so, then settle at about 4 percent for through 2019. The agency assumes the economy will grow at about 2.3 percent this year, down significantly from 2018, and then fall to an average of about 1.7 percent through 2023.
This gloomy forecast leaves unanswered the question: Do burgeoning deficits and debt matter? Less than you may think, say Summers, who was Treasury Secretary in the Clinton Administration, and Furman, who chaired the Council of Economic Advisers in the Obama Administration. They argue that Congress should worry more about issues such as “languishing labor-force participation rates, slow economic growth, persistent poverty, a lack of access to health insurance, and global climate change.” Large deficits, they say, should not deter government from addressing these challenges.
Bond market signals
They do say that “Congress should pay for new measures with either spending cuts or extra revenues, except during recessions,” but insist there is no need for lawmakers to take active steps to reduce existing debt levels. That should await signals from the bond market that government debt is too high.
The problem, of course, is that once it becomes unambiguous that the bond market is sending those signals, it may be too late. If rapidly rising interest rates throw the economy into a tailspin, they create an environment where Congress may be even less willing to cut spending or raise taxes. What lawmaker would try to impose fiscal restraint on an economy slipping into recession?
Summers and Furman are arguing what policy advocates in both parties have been saying for decades: Their priorities are more important than fiscal prudence. It is an attractive claim, especially for those who must run for reelection. The rest of us—and our children-- can only hope they are right.
