WaPo: 'Don't Write Off The Deficit'

Yesterday, the Washington Post’s editorial board had a good piece making the case that we still have a debt problem today, and that tomorrow’s debt requires attention now. 

The forces of complacency may find more ammunition in the Obama White House’s most recent fiscal update. The Office of Management and Budget estimates that the federal deficit will be $759 billion in the year ending Sept. 30, or 4.7 percent of gross domestic product (GDP) — rather than $973 billion and 6 percent of GDP, as it calculated in April. The OMB numbers rest on the unlikely assumption that President Obama’s tax and spending policies get enacted. Still, they are consistent with declining deficit forecasts from the Congressional Budget Office (CBO), which assume no change in current law. . . .

The report projects that net public federal debt will remain above a historically abnormal 65 percent of GDP through 2023, assuming no wars or major recessions in the interim. . . .

Mr. Obama and Congress need to turn their attention back to fiscal policy precisely because current law sets a path for government under which more and more money will flow on autopilot — into Social Security, Medicare and other entitlements — while the resources to deal with any other needs, defense or non-defense, get squeezed. In other words, when our leaders avoid the country’s long-term fiscal issues, they avoid their most basic responsibility: to govern.

While they call for the repeal of sequestration because of its counter-productive consequences, they do once again remind their readers that the country’s very serious debt problem rests in the the growth of programs that are on autopilot, such as Medicare, Social Security, and Medicaid. In my recent Reason column on this same topic, I write about this out-of-control spending growth:

And even these dire debt numbers pale in comparison to the magnitude of current unfunded liabilities. According to the Financial Statement of the United States, which looks at the government’s net financial position, as of 2012 the American people have been promised about $55 trillion worth of future benefits (through Social Security, Medicare, and other government programs) that the federal government does not have the money to pay. 

With the impending entitlement crisis requiring even more future borrowing, by 2023 interest on our debt, plus autopilot programs such as Social Security, Medicare, and Medicaid, will account for 75 cents of every dollar spent by the federal government, up from 45 cents in 2010. In other words, starting now, non-interest and non-autopilot programs will gradually be squeezed out by everything else. 

Unfunded liabilities as measured by the Treasury is now $55 trillion, but other scholars have come up with much large estimates :

• In 2012, former chairman of the SEC Chris Cox and former chairman of the House Ways & Means Committee Bill Archer, using data from the Medicare and Social Security Trustees Reports, found roughly $87 trillion in unfunded liabilities. Their measures account for the unfunded liabilities — including Social Security, Medicare, federal workers’ pensions — in addition to the official debt.

• Boston University economist Laurence Kotlikoff calculates a “fiscal gap” amount of $222 trillion using the Congressional Budget Office’s alternative long-term budget forecast. The fiscal-gap measure takes into consideration the present value of all the expenditures now through the end of time (including servicing the official debt) and subtracts all the projected taxes from that amount.

Here is a chart with the different estimates to put them in perspective:

Both alternative debt figures dwarf the official $16 trillion debt figure, even when you add the Treasury’s estimate of $55 trillion in unfunded liabilities and come up with a total of $71 trillion. Obviously, that’s a lot of promised spending that the government doesn’t know how to pay for. But as I have said before, the main reason why our debt crisis needs to be addressed today is that failing to do so will result in burdening future generations with higher interest rates, lower growth, higher unemployment rates, and lower standards of living. We are about to embark on the most massive transfer of wealth from younger taxpayers to the elderly in American history. It’s both unprecedented and unfair. Of course, you don’t have to take my word for it. For a chilling warning of the consequences of living in a high-debt world read the June CBO report:

Such high and rising debt later in the coming decade would have serious negative consequences: When interest rates return to higher (more typical) levels, federal spending on interest payments would increase substantially. Moreover, because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced. In addition, lawmakers would have less flexibility than they would have if debt levels were lower to use tax and spending policy to respond to unexpected challenges. Finally, a large debt increases the risk of a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

You can find interesting CBO charts on our current debt levels here.