Washington Is In Denial About the Budget Deficit

December 4, 2013

While the Conference Committee on the 2014 budget argues over scraps, the big picture of the nation’s budget deficit remains unchanged. Recent reports from the Social Security Trustees, the Congressional Budget Office, and the Committee for a Responsible Federal Budget show that, as CBO director Doug Elmendorf puts it, our deficit problem “has hardly been addressed.” Despite the overwhelming evidence of impending deficit problems, many members of congress, budget experts, and editorial page writers are denying the problem is that serious. In a situation like this, on the eve of what seems headed for yet another congressional copout, the alarming long-term numbers cannot be stated too often. Nor can the outline of policies that represent the only reasonable deficit solution.

Summarizing across the reports mentioned above, three points capture the nation’s deficit problem. None of them are new. First, after the current brief slowdown in the accumulation of debt, starting in 2018 it will begin rising again. Compared with the current debt which equals 73 percent of GDP, by 2038 the debt-to-GDP ratio will increase to 100 percent or more; by the 2060s, the debt will be twice the size of GDP. Second, the major cause of increasing debt will be the combination of growth in health care programs, especially Medicare, Social Security, and net interest. According to CBO, spending on these three categories will increase to 19 percent of GDP by 2038, a little more than twice the average of 9 percent over the past four decades. These rapid increases in debt will occur despite all the budget actions that have been taken so far and despite an increase in revenue from 16 percent of GDP in 2012 to nearly 20 percent of GDP by 2038. Third, given these projections, the simple fact is that the nation cannot avoid a fiscal crisis at some point in the future. Thus, the prudent and least difficult course is to take actions now that will reduce future debt.

CBO has spelled out the consequences of our large and growing debt if action is not taken. First, CBO warns that the massive federal borrowing that will be necessary to finance the debt will reduce private investment which would in turn result in a lower stock of capital and put downward pressure on economic output and incomes. Second, because interest payments will rise substantially, either spending programs will have to be cut or taxes increased more than they otherwise would be in order to reach any deficit target congress and the president might select. Third, the flexibility of the federal government to meet future challenges such as natural disasters, terrorist attacks, recessions, or other emergency needs will be reduced. Fourth, the risk of a fiscal crisis in which investors will not buy federal bonds unless we pay “very high interest rates” will be increased.

Nor is the solution any mystery. No bipartisan deal is possible unless both reduced spending and increased revenue are included. The biggest spending problem is that medical care, Social Security, and net interest will be growing so rapidly that the rest of government will be squeezed. This process has already begun. Researchers at the Urban Institute, for example, have shown that spending on children has already started to decline. Ditto for the military and many other items in the budget. A more reasonable way to cut spending than sequestration would be to cut redundant programs, programs that have been shown by evidence to be failing, and programs that have excessive fraud. The reduced spending must include health care spending, especially by increasing the share of health expenses paid by the affluent elderly and by reforms that force people to pay more out of pocket for the medical services they receive. Modest changes in Social Security are also necessary. In addition, it would make sense to implement and study premium support Medicare reform in two or three states.

The only way Democrats will agree to reductions in entitlement spending is if revenues are increased. There are many possible choices for revenue increases, including a consumption tax and reducing the more than $1 trillion a year in tax expenditures. When Democrats hate entitlement cuts and Republican hate taxes, the only political solution is to do both.

But almost no one thinks any major deal is in the offing. It looks increasingly like the nation will need a near-death experience before policymakers will take action. The public has not elected people to congress or the presidency who put the future of the nation ahead of their own political interests and the interests of their party. In the end, as always in a Democracy, if citizens want to know why Washington can’t solve the deficit problem, look in the mirror.