A repeated cry of alarm eventually becomes tiring and is eventually ignored. Although such warnings may prove premature, they are not necessarily wrong.
The United States public debt may prove to be one terrifying example.
Alleged worrywarts have been obsessing over the annual budget deficits and the accumulated debt for about 40 years now. But the problem has always faded away.
Many Americans likely have concluded that it will always go away. They say we should just relax and enjoy big tax cuts (which some even argue would solve the problem), a huge infrastructure binge, and a major defense expansion that would boost the economy and supposedly keep us safe. Just as it always has, these people assume, the problem will just go away. But there are reasons to be concerned.
Tax increases in 1982 and 1984, supported by the Gipper himself, took back roughly one-third of the 1981 tax cuts, although most of the increases may have been ignored by the voters because they hit mainly corporations. A 1990 budget deal, notable for the violation of President George H.W. Bush’s “read my lips” pledge, cut spending, raised taxes and changed Congress’ entire budget process. The president paid for that deal with his job.
But for all of that pulling and hauling over 12 years, the public debt-to-gross domestic product (GDP) ratio, or the nation’s equivalent of the mortgage-to-income ratio for which a banker might ask you, had doubled from about 25 percent to about 50 percent. More debt and more federal government interest payments means more tax dollars buying no national defense, no roads, only keeping legal with the nation’s creditors.
The problem did seem solved eight years later. But even then, it didn’t “just go away.” President Bill ClintonBill ClintonChelsea Clinton: Let Barron Trump be a kid Clinton: Photos from women’s march ‘awe-inspiring’ Trump thanks Obama for 'beautiful' letter MORE’s 1993 deficit reduction plan of spending cuts and tax increases made his party no friends at the polls. The Democrats who voted for the plan were routed in the 1994 election, losing 54 seats in the House, eight in the Senate, and control in both. Opinions differ about what turned the tide, of course, but this election bloodbath was followed by budget surpluses. In eight years, the debt was down to roughly 33 percent of GDP.
In other words, the debt problem did not “just go away,” but rather was turned around through painful decisions by members of both parties with some severe political consequences.
Of course, now we are in a very different place. Over the last 16 years, with new tax cuts, new spending increases, a war and a financial crisis, the debt burden is way up. It now stands at 75 percent of GDP. Yet some remain convinced that “deficits don’t matter” because they always “just go away.”
But now we face a second reason for concern: rising interest rates.
Until this point, a partially valid argument why “deficits don’t matter” has been that interest rates have been near zero in the weak post-financial crisis economy. That held the cost of interest on the debt down, too. But now the Federal Reserve has sent a signal that interest rates will rise. Many will understand that this means higher interest rates for business loans and home mortgages.
For that same reason, Uncle Sam is looking like a spendthrift who was taken in by loans at teaser interest rates that are just about to start adjusting upward, big time. The federal government’s loan payment bill could easily increase by a factor of five—or more, if markets get nervous—in just a decade. Those interest bills will raise the deficit, which will raise the debt, which will raise the interest bills, in a brutally vicious cycle.
We had best start rethinking our budget plans. The boy who cried “debt” may have been playing tricks on his countrymen. Or perhaps, he just had better eyesight than everyone else.
Joseph Minarik is senior vice president and research director of the Committee for Economic Development. He was chief economist in the White House Office of Management and Budget for eight years under President Clinton. He is co-author of the forthcoming book “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity” that will be published in February 2017.
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