How much should we worry about the national debt?

Somewhat, but not too much, argues this Foreign Affairs article co-written by Lawrence Summers:

The deficit dismissers have a point. Long-term structural declines in interest rates mean that policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments in such areas as education, health care, and infrastructure. Yet many remain fixated on cutting spending, especially on entitlement programs such as Social Security and Medicaid. That is a mistake. Politicians and policymakers should focus on urgent social problems, not deficits.

But they shouldn’t ignore fiscal constraints entirely. The deficit fundamentalists are right that the debt cannot be allowed to grow forever. And the government cannot set budget policy without any limiting principles or guides as to what is and what is not possible or desirable.

There is another policy approach that neither prioritizes cutting deficits nor dismisses them. Unlike in the past, budgeters need not make reducing projected deficits a priority. But they should ensure that, except during downturns, when fiscal stimulus is required, new spending and tax cuts do not add to the debt. This middle course would tolerate large and growing deficits without making a major effort to reduce them—at least for the foreseeable future. But it would also stop the policy trend of the last two years, which will otherwise continue to pile up debt.

Policymakers must also recognize that maintaining existing public services, let alone meeting new needs, will, over time, require higher revenues. Today’s large deficits derive more from falling revenues than rising entitlement spending. More spending is not, by itself, something to be afraid of. The United States needs to invest in solutions to its fundamental challenges: finding jobs for the millions of Americans who have given up hope of finding them, providing health insurance for the millions who still lack it, and extending opportunities to the children left behind by an inadequate educational system.

Economic textbooks teach that government deficits raise interest rates, crowd out private investment, and leave everyone poorer. Cutting deficits, on the other hand, reduces interest rates, spurring productive investment. Those forces may have been important in the late 1980s and early 1990s, when long-term real interest rates (nominal interest rates minus the rate of inflation) averaged around four percent and stock market valuations were much lower than they are today. The deficit reduction efforts of Presidents George H. W. Bush and Bill Clinton contributed to the investment-led boom in the 1990s.

Today, however, the situation is very different. Although government debt as a share of GDP has risen far higher, long-term real interest rates on government debt have fallen much lower.

As shown in the table, in 2000, the Congressional Budget Office forecast that by 2010, the U.S. debt-to-GDP ratio would be six percent. The same ten-year forecast in 2018 put the figure for 2028 at 105 percent.

Real interest rates on ten-year government bonds, meanwhile, fell from 4.3 percent in 2000 to an average of 0.8 percent last year.

Those low rates haven’t been manufactured by the Federal Reserve, nor are they just the result of the financial crisis. They preceded the crisis and appear to be rooted in a set of deeper forces, including lower investment demand, higher savings rates, and widening inequality. . . .

Low interest rates mean that governments can sustain higher levels of debt, since their financing costs are lower. Although the national debt represents a far larger percentage of GDP than in recent decades, the U.S. government currently pays around the same proportion of GDP in interest on its debt, adjusted for inflation, as it has on average since World War II. The cost of deficits to the Treasury is the degree to which the rate of interest paid on the debt exceeds inflation. By this standard, the resources the United States needs to devote to interest payments are also around their historical average as a share of the economy. Although both real and nominal interest rates are set to rise in the coming decade, interest payments on the debt are projected to remain well below the share reached in the late 1980s and early 1990s, when deficit reduction topped the economic agenda.

Government deficits also seem to be hurting the economy less than they used to. Textbook economic theory holds that high levels of government debt make it more expensive for companies to borrow. But these days, interest rates are low, stock market prices are high relative to company earnings, and major companies hold large amounts of cash on their balance sheets. No one seriously argues that the cost of capital is holding back businesses from investing. . . .

The eurozone debt crisis at the start of this decade is often held up as a cautionary tale about the perils of fiscal excess. But stagnant growth (made worse by government spending cuts in the face of a recession) was as much the cause of the eurozone’s debt problems as profligate spending. . . .

It’s true that future generations will have to pay the interest on today’s debt, but at current rates, even a 50-percentage-point increase in the U.S. debt-to-GDP ratio would raise real interest payments as a share of GDP by just 0.5 percentage points. That would bring those payments closer to the top of their historical range, but not into uncharted territory.

Deficits, then, should not cause policymakers much concern, at least for now. But some economists adopt an even more radical view. Advocates of what is known as modern monetary theory (MMT), such as Stephanie Kelton, an economist and former adviser to Senator Bernie Sanders’ presidential campaign, have been widely interpreted as arguing that governments that borrow in their own currencies have no reason to concern themselves with budget constraints. . . . This goes too far. . . . In truth, no one knows the benefits and costs of different debt levels. . . .

Although the U.S. government will remain solvent for the foreseeable future, it would be imprudent to allow the debt-to-GDP ratio to rise forever in an uncertain world. Trying to make this situation sustainable without adjusting fiscal policy or raising interest rates, as recommended by some advocates of modern monetary theory, is a recipe for hyperinflation.

"This is fiscal child abuse pure and simple . . .

. . . and [Paul] Krugman should be ashamed of his contribution to it."

So says Laurence Kotlikoff (who was a third-party presidential candidate in 2012). More:

The U.S. fiscal gap of $222 trillion is enormous and totally unsustainable. But rather than discuss the fiscal gap, Krugman discusses the official debt which is one-twentieth as large and . . . a measure of the government's words, not its policies.

Of course, once you have the emperor convinced that his new clothes are for real, you can take full advantage of his ignorance. Krugman is doing this with his readers. He's taking advantage of their ignorance by showing that a non-measure of government sustainability, intentionally designed to be as small as possible, is not of major concern. And in claiming that the long-run is distinct in terms of policy from the short run and can be ignored until we reach it, he's persuading his readers that they needn't worry about the fiscal Sword of Damocles suspending over our children's heads. . . .

There is not a single dynamic model of the economy's dynamic transition being published in leading economics journals that doesn't include the constraint that the fiscal gap be zero. But Krugman simply discards what we academic economists call the government's intertemporal budget constraint.

Let's be clear. Generationally speaking, paying for the government's spending is a zero sum game. Eliminating the fiscal gap -- satisfying the government's intertemporal budget constraint -- requires either a) an immediate and permanent 64 percent hike in all federal taxes or b) an immediate and permanent 35 percent cut in all projected government outlays including those called "interest and principal." If we wait a decade to take our medicine, these figures become 70 percent and 38 percent respectively. And, guess what? In that case, our children will face even higher taxes or lower spending over their precious lives.

To put the fiscal gap of $222 trillion in perspective, the whole United States GDP is only about $15 trillion. Kotlikoff adds:

These aren't my estimates of the fiscal gap or what's needed to close it. They are my calculations based on the Congressional Budget Office's long-term fiscal forecast called the Alternative Fiscal Scenario. The CBO publishes this forecast in June each year. Last June the fiscal gap was $222 trillion. In June 2011 it was $211 trillion. It rose by $11 trillion between 2011 and 2012, which is the same amount as the entire stock of federal debt! The reason, in large part, is that baby boomers got one year closer to cashing in on all those Social Security, Medicare, and Medicaid payments which they are owed, but which have conveniently been ignored in tallying up federal debt.

Here's Kotlikoff talking about this problem with Glenn Loury:

Thomas Sowell on the need to end Medicare as we know it

Sowell writes:

There are people who take seriously such statements as those by President Barack Obama that Republicans want to "end Medicare as we know it."

Let's stop and think, if only for the novelty of it. If you make any change in anything, you are ending it "as we know it." Does that mean that everything in the status quo should be considered to be set in concrete forever?

If there were not a single Republican, or none who got elected to any office, arithmetic would still end "Medicare as we know it," for the simple reason that the money in the till is not enough to keep paying for it. The same is true of Social Security. . . .

We are not yet Greece, but we are not exempt from the same rules of arithmetic that eventually caught up with Greece. We just have a little more time. The only question is whether we will use that time to make politically difficult changes or whether we will just kick the can down the road, and keep pretending that "Medicare as we know it" would continue on indefinitely, if it were not for people who just want to be mean to the elderly.

In both Europe and America, there are many people who get angry at those who tell them the truth that the money is just not there to sustain huge welfare state programs indefinitely. But that anger might be better directed at those who lied to them by promising them benefits that were inherently unsustainable.

Medicare and reality

An article in Reason magazine defends Paul Ryan's Medicare plan:

At the rate we're going, Medicare, Medicaid, Social Security, and interest payments will consume the entire federal budget by 2025—leaving nothing for defense, law enforcement, national parks, highways, food stamps and all the other responsibilities the government is supposed to handle. Either drastic spending cuts or staggering tax increases would be needed.

To insist that Medicare can and should remain just as it is today is either delusional or dishonest . . . .

It's easy to improve health care if cost is no object. It's easy to reduce costs if you can tolerate worse health outcomes. The trick is to balance the two needs. The Ryan plan is a credible attempt. . . .

Democrats have a point in saying what Ryan offers is not as good as the current version of Medicare. It's also not as good as the Big Rock Candy Mountain, the pot of gold at the end of the rainbow or the valley of Shangri-La.

His option does, however, have the virtue of a connection to the real world. It's a place his critics can't avoid forever.

In praise of Paul Ryan

The left-leaning columnist William Saletan writes:

Ryan refutes the Democratic Party’s bogus arguments. He knows that our domestic spending trajectory is unsustainable and that liberals who fail to get it under control are leading their constituents over a cliff, just like in Europe. Eventually, you can’t borrow enough money to make good on your promises, and everyone’s screwed. Ryan understands that the longer we ignore the debt crisis and postpone serious budget cuts—the liberal equivalent of denying global warming—the more painful the reckoning will be. There’s nothing compassionate about that kind of irresponsibility.

Maybe, like me, you were raised in a liberal household. You don’t agree with conservative ideas on social or foreign policy. But this is why God made Republicans: to force a reality check when Democrats overpromise and overspend.

Ryan refutes the GOP’s bogus arguments, too. He proves that you don’t need private-sector experience to be a good lawmaker. He proves that a genuine conservative, as opposed to a Tea-Party ideologue, votes for bailouts when economic sanity requires them. Ryan also shows that a real conservative doesn’t worship any part of the budget, including defense. His expenditure caps can’t be squared with Romney’s nutty pledge to keep military spending above four percent of GDP. And Ryan destroys Romney’s ability to continue making the dishonest, anti-conservative argument that Obamacare is evil because it cuts Medicare. Now Romney will have to defend the honest conservative argument, which is that Medicare spending should be controlled. . . .

It speaks enormously well for Romney that he made this choice. It tells me he’d run the country the same way he ran Massachusetts: as a prudent, numbers-oriented businessman. . . .

The party of John Boehner and Mitch McConnell, the party of spite and bloviating and recklessness and extremism, isn’t for me. I’m voting for Obama. But four years from now? In a stronger economy, with a runaway debt? And Ryan at the top of the ticket? That’s awfully tempting.

That last paragraph is a bit strange: does Saletan really believe that bloviation is a more serious problem than the deficit?

"Should All Young Americans Be Fiscal Conservatives?"

Good question:

If young Americans knew what was good for them, would they all support aggressive deficit-cutting plans that slash government spending across the board? . . .

The federal government spends more than seven times as much on someone 65 or older as it does on a child. Even after you include state and local spending on public schools, total spending per person on children is less than half that for the elderly. Over the past decade, the number of children in poverty has soared, and over the rest of this decade, spending on children will shrink by a fifth (as a percentage of total federal spending), while spending on the elderly will swell even more. On the current path, in 25 years Social Security, health-care and interest on accumulated debt would consume all Federal government revenue, according to the latest Congressional Budget Office projections. . . .

Current policies will continue to shift resources from the young to the old. Moreover, these policies are ultimately unsustainable, so that when today’s young people retire, they will not be able to count on full benefits. Without a change in policy, in 40 years Social Security will only be able to pay three-quarters of the payouts that have been promised. The gap cannot be closed by tax increases alone without sizable spending cuts.

IN THE COMMENTS: Jason (the commenter) suggests an explanation:

Money the government is spending on old people means young people are free not to take care of them.

The European and North American bubble

Mark Steyn writes:

[T]he unsustainable "bubble" is not student debt or subprime mortgages or anything else. The bubble is us, and the assumptions of entitlement. Too many citizens of advanced Western democracies live a life they have not earned, and are not willing to earn. Indeed, much of our present fiscal woe derives from two phases of human existence that are entirely the invention of the modern world. Once upon a time, you were a kid till you were 13 or so; then you worked; then you died. That bit between childhood and death has been chewed away at both ends. We invented something called "adolescence" that now extends not merely through the teenage years but through a desultory half-decade of Whatever Studies at Complacency U up till you're 26 and no longer eligible for coverage on your parents' health insurance policy. At the other end of the spectrum, we introduced something called "retirement" that, in the space of two generations, has led to the presumption that able-bodied citizens are entitled to spend the last couple of decades, or one third of their adult lives, as a long holiday weekend.

Any functioning society is like an orchestra. When the parts don't fit together, it's always the other fellow who's out of tune. So the Greeks will blame the Germans, and vice-versa. But the developed world is all playing the same recessional. In the world after Western prosperity, we will work till we're older, and we will start younger – and we will despise those who thought they could defy not just the rules of economic gravity but the basic human life cycle.

Breaking down Obama's "jobs" plan (stimulus)

1. An "Absolute Moron's Guide."

2. A smart person's assessment.

Here are some highlights from that second link (by Megan McArdle):

The infrastructure stuff will be fine, if we choose good projects--America needs roads and airports and so forth. But as we discovered with the previous round, the better the project, the worse the stimulus. There are no terrific infrastructure projects sitting around, waiting to break ground next week . . . nay, not even if we streamline the regulatory red tape.

For that matter I'm not even sure that the president has the authority to streamline most of that red tape, and I'm highly skeptical that Congress is going to get busy undoing several decades worth of environmental and anti-corruption protections. So most of that $100 billion is not going to be spent next year--presumably, even the school rehab is going to have to wait until summer, when what we need is jobs right now. . . .

She also points out that Obama hasn't proposed any way to pay for the plan. She quotes from Obama's speech:

The agreement we passed in July will cut government spending by about $1 trillion over the next ten years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I'm asking you to increase that amount so that it covers the full cost of the American Jobs Act. And a week from Monday, I'll be releasing a more ambitious deficit plan -- a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.

Then she quotes a Twitter post, summing up Obama's message to Congress:

"Here's the deal: I take credit for the new spending now; you take credit for making politically unpopular cuts later."

McArdle adds:

This is becoming a signature move for Obama. . . .

But it's hardly been a rousing success when Democrats tried to maneuver the Republicans into putting their sticky little fingerprints all over the unpopular parts of their plans while taking credit for the successes, which is what this boils down to. During the speech, Justin Wolfers tweeted to the effect that the GOP wouldn't dare vote against these hard-to-dislike provisions. I take it that this sentiment is common among liberals, who expressed approval that Obama was finally taking it to Republicans.

I'm less sure. For one thing, they've got a legitimate critique: it isn't paid for. Of course, if you want more stimulus, you don't want it to be paid for next year . . . but it isn't paid for at all. Select committees are turning into the Laffer Curve of the left: every time you want more money to pay for something, assign a committee to make unspecified cuts years in the future.

Republican complaints that the spending will happen and the pay-fors won't aren't unreasonable, and I suspect they'll get some traction with independents.

Judge Richard Posner on economic recovery and the deficit

This whole article is well worth reading.

A sample:

The problem is not the level of the debt but its growth. In the seven years between 2000 and 2007 (the last year before the financial crisis that triggered the current depression), the public debt grew in real (that is, inflation-adjusted) terms by 56 percent, the consequence of reckless spending and tax cuts by the Bush administration. Between 2007 and 2012 (the debt in fiscal 2012, which ends September 30 of next year, is of course an estimated number), a shorter period, the nation’s public debt will have grown by another 134 percent. . . . These annual rates of growth vastly exceed the rate of the nation’s economic growth even in prosperous times, and if they continue will bankrupt the federal government.

Unfortunately, even when the economy recovers, and tax revenues increase, the federal deficit will continue to rise because of the rapid growth of entitlement expenditures—primarily Medicare and Social Security and, because of the health-reform law, Medicaid. . . .

[T]he deficit, politics aside, should be manageable. But it’s worth pointing out that anything that takes money out of the economy, such as reducing federal spending or increasing federal taxes, will exacerbate the current depression. Consumers will have less money to spend, and this will discourage employers from hiring. So the reforms that I have been discussing should be phased in gradually over a period of years.

But it’s not clear that we have enough years. . . .

Posner concludes that we're in "a quandary. I don’t see a way out of it. I hope others do."

Conservatives criticize Republicans' "growth"-based economic policy.

Kevin Williamson writes in the National Review:

If we had the ability to know in advance how much growth particular economic policies would produce — or even whether they would produce growth at all — then we would never have a recession. We would always be at the sweet spot of maximum real growth. But we are limited and fallible creatures, and right-wing political macroeconomic management is no more reliable, or predictable in its outcomes, than is Keynesian political macroeconomic management. The economy is not a machine, and any time a politician says, “If we will adopt Policy X, we are sure to achieve Statistical Abstraction Y,” he is talking through his hat. . . .

We probably credit politicians too much for good economic outcomes and blame them too much for bad economic outcomes. The economy is big and complex; public finances are less so, and we could, right now, enact policies that would address the imbalances in those public finances, and do so in an orderly and largely predictable way. But that means making very unpleasant choices of the sort that are bound to be keenly unpopular with voters in New Hampshire, Iowa, Florida, etc. . . .

It is important to work toward growth, of course, and to adopt good economic and monetary policies that we think will encourage it. . . . But counting on optimistic assumptions about growth beyond current projections is, for the most part, a way to evade the very difficult business of reconciling our public income with our public spending. We have to work with what we have, with the reality before us.

Ross Douthat, the New York Times' house conservative, links to Williamson's piece and adds that Republican presidential candidate Tim Pawlenty has been engaging in

magical thinking, in which cutting taxes on business, investment and high-earners leads to 5 percent growth every year for a decade — something that neither the Reagan nor the Clinton booms came close to achieving — which in turn goes a long way toward closing the budget deficit, happily, before we have to start in on painful cuts.

Ramesh Ponnuru (who writes for the National Review) has more thoughts on how Republicans "don't appear to be trying very hard" to come up with a realistic economic agenda. "[H]alf-remembered bits of Reaganism aren’t a sufficient conservative agenda for today."

When conservatives are so consistently attacking Republican policy — not for being too squishy or compromising with Democrats, but for being too rigidly, ideologically extreme — those conservatives are worth taking seriously.

What Medicare services should be cut?

The New York Times' Room for Debate gives some suggestions.

Incoherent views on taxes, spending, and the deficit

Bruce Bartlett (who was an economic policy advisor for Presidents Reagan and Bush Sr.) runs through 15 recent polls of the American public's views on taxing and spending.

Some of the most disheartening points:

[T]hree-fifths of voters believe that the budget can be fixed just by eliminating waste, fraud and abuse. . . .

[S]upport for cutting spending is largely confined to small programs such as foreign aid, and that people favor increasing spending for big programs such as Social Security. . . .

[O]nly 49 percent of people believe that reducing the deficit will require cuts in programs that benefit them; 41 percent do not. Also, only 37 percent of people believe that reducing the deficit will require higher taxes on them; 59 percent do not.

People overestimate how much we spend on foreign aid, and they underestimate how much we spend on Medicare and Social Security. We want to believe that if we happen to like a program, it doesn't cost too much. "Big government" is bad, so the biggest programs must be the ones we don't like.

Fake outrage over the deficit from the Pledge to America (and everyone else)

Dan Drezner and Megan McArdle notice that the Republican Party's Pledge to America repeats the same incoherent set of positions we've been getting from the Democratic and Republican sides for decades:

1. We can't raise taxes.

2. We can't cut military or entitlement spending.

3. We have to reduce the deficit.

As Drezner says: "Good luck with that."



McArdle has a good rebuke to Tea Partiers who claim to be passionately opposed to the high deficit:

That's sort of like saying, "I want to be a size 6 and run marathons. I just don't want to do the part where I stop eating and go running."

ADDED: This is the Paul Krugman column that Drezner mentions (and agrees with. Krugman says:

In essence, what [the House Republicans] say [in the Pledge to America] is, “Deficits are a terrible thing. Let’s make them much bigger.” The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which independent estimates say would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration’s tax proposals.

True, the document talks about the need to cut spending. But as far as I can see, there’s only one specific cut proposed — canceling the rest of the Troubled Asset Relief Program, which Republicans claim (implausibly) would save $16 billion. That’s less than half of 1 percent of the budget cost of those tax cuts. As for the rest, everything must be cut, in ways not specified — “except for common-sense exceptions for seniors, veterans, and our troops.” In other words, Social Security, Medicare and the defense budget are off-limits.

So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid . . . No more highway construction. No more homeland security. Oh, and no more Congress.”

"How to fix Social Security in one graph"

That's how Ezra Klein describes the graph over there, which he gets from the Center on Budget and Policy Priorities.

The CBPP explains, based on an August 2010 report by the Social Security Board of Trustees:

The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat.

Here are a few more points from the report, again summarized by the CBPP:

• The trustees continue to estimate that the trust funds will be exhausted in 2037— the same date that they forecast in last year’s report.

• Even after 2037, Social Security could pay more than three-fourths of scheduled benefits using its annual tax income. Those who fear that Social Security won’t be around when today’s young workers retire misunderstand the trustees’ projections.

• The program’s shortfall is relatively modest, amounting to 0.7 percent of Gross Domestic Product (GDP) over the next 75 years (and 1.4 percent of GDP in 2084). A mix of tax increases and benefit modifications — carefully crafted to shield recipients of limited means, potentially make benefits more adequate for the neediest beneficiaries, and give ample notice to all participants — could put the program on a sound footing indefinitely.

Americans don't want taxes raised or spending cut.

According to this poll by Harris.

I guess people must love deficits.

Details:

A 71 percent to 15 percent majority of adults do not think "it is necessary to increase taxes to reduce the budget deficit". Large majorities of Republicans, Democrats and Independents feel this way...

When it comes to cutting government spending, there is little support for cutting any substantial programs.

When asked what should be cut if something had to be cut, almost no one, including Republicans, said Medicaid, Medicare, Social Security, or education. By far the most popular thing to be cut is the space program.

I found out about the poll from Matthew Yglesias, who links to it on Twitter and sums it up this way:

everything is unpopular

Or is it the opposite? This poll says that people don't want anything taken away. So ... everything's popular!

Americans don't want the government taking away their money. But we want to keep getting everything the government gives them. We want it all.

As the Harris report says,

Once a tax has been cut, there is usually a lot of resistance to increasing it again. And, once money is committed to a program or entitlements are established, cutting back on that spending is also very tough.

RELATED: Thing you're not supposed to point out #1.

Up with taxes

This is the most interesting thing I've read about taxes in a while.

The whole article is very useful, but here's a sample:

Your taxes are going up.

They will probably go up in the coming decade, and the increase will be permanent. For a half-century, federal taxes have remained fairly constant relative to the size of the American economy — equal to about 18 percent of gross domestic product. But the 18 percent era has to end soon.

It won’t end because President Obama is some radical tax and spender, either. It will end because of a basic economic reality.

Americans have made it clear that they want a certain kind of government, one that can field a strong military and also maintain popular programs like Medicare. Yet we are not paying nearly enough taxes to maintain those programs. ...

“Something that’s unsustainable, like a dysfunctional relationship, can go on longer than you expect,” [President Obama's budget director Peter Orszag] has said, “and then end faster and messier than you think.”

RELATED: "1. The will of the people is wrong."