Remember the deficit? Remember the debt?

Peter Suderman on …

For most of the Obama era, the federal deficit—and, by extension, the debt—was a crisis.

This was a bipartisan belief, held, or at least paid respectful lip service, by the Tea Party radicals and top administration aides as well as by President Obama himself. Hence the battles over the debt limit; the imposition of sequestration cuts that, fully implemented, were intended to reduce spending by more than $1 trillion over a decade; the concurrent increase in tax rates on high earners; the creation of the National Commission on Fiscal Responsibility and Reform, better known as the Supercommittee; and the Simpson-Bowles debt-reduction proposal to which it led.

In the end, that plan was rejected by party leaders on both sides. But the idea, that trillion dollar deficits and the pile-up of debt they incur represented a problem, remained alive and powerful to the end. Even President Trump campaigned on (fanciful and mostly incoherent) promises to eliminate the federal debt. The federal budget was an emergency or at least a looming threat. Something had to be done.

But two and a half years into the Trump administration, neither party acts as if there’s a crisis.

On the Republican side, the party’s most notable legislative accomplishment was a deficit-increasing tax-cut bill that reduced revenues without offsetting spending cuts. At least for a while, Trump appeared to be under the false impression that federal debt could be paid down with tariff revenue. Trump’s all-purpose acting henchman, the one-time fiscal hawk Mick Mulvaney, has argued in favor of new deficits.

Amongst Democrats, the GOP’s abandonment of deficit politics has freed the party’s progressives to propose massive spending increases, while elevating economic theoriesthat excuse, or even encourage, a deficits-forever approach to budgeting.

The budget process itself is deeply broken, leading to last minute, quasi-temporary spending deals that come together only because Republicans want to secure more funding for the military while Democrats obtain more funding for domestic programs. Medicare and Social Security remain the largest long-term drivers of the debt, yet the project of entitlement reform looks effectively dead.

The 2020 presidential campaign is in full swing, yet debt and deficits have barely been mentioned. Relatedly, public concern about the issue has dwindled since 2013. In just a few years, American politics has been overtaken by a free-spending sense that debt and deficits just. Don’t. Matter.

And yet the underlying fiscal situation hasn’t changed. If anything, it has become worse. The budget is now on a trajectory toward trillion dollar deficits, and the total federal debt has soared past $21 trillion. And old-age entitlements are rapidly nearing the point of fiscal failure.

Consider Social Security. Earlier this year, the program’s trustees projected that it would be insolvent—unable to pay all of its bills—in just 16 years. Starting next year, the program will begin tapping its trust fund assets in order to pay its full benefits. Eventually, that fund, which itself is a kind of accounting fiction, will be gone, and the program will only be able to pay out a portion of its benefits.

Medicare’s finances are, in some ways, in even more dire shape: Although Social Security’s shortfall is larger, Medicare’s main trust fund is expected to reach insolvencyin 2026, at which point it will be able to pay just 89 percent of its bills. That’s just two presidential elections away, and yet nearly all of the current discussion about Medicare is about whether and how to expand it.

This is the new free-lunchism, and it is driven almost entirely by the politics of convenience and short-term thinking: Voters want more benefits and more spending but not the broad middle-class tax hikes that other countries rely on to pay for those benefits, and politicians across the aisle have responded by offering them exactly the combination they want, with predictable results. There is a prevailing sense amongst both voters and lawmakers that there is little cost to doing so, at least for now. After all, the debt-driven calamities warned about during the Obama era never came to pass. So why worry now?

In part, this is a misunderstanding of how debt crises work. Typically they don’t announce themselves years in advance and provide the public and the political class time to prepare. By the time a crisis arrives, it is, almost definitionally, already too late.

And to the extent debt crises do announce themselves, it’s unlikely to be through anything dramatic. Instead, the early warnings are likely to come through boring and somewhat uncertain projections from actuaries and government economic offices, think tanks that seem to always warn of an impending debt crisis, and deficit-hawk politicians who gripe that no one ever listens to them. The signs and portents, in other words, would look something like what we’re already seeing now.

The current lack of concern about deficits is also partially a result of a re-thinking by some economists, especially on the left and center-left, about the relative importance of deficits; maybe deficits will matter at some point, this line of thinking goes, but not as much as previously thought, and certainly not at present.

Intentionally or not, this line of thinking has given the political class, which rarely considers economic ideas with much nuance, a license to make ever-more extravagant and expensive promises. It has resulted in a calculation, probably correct, that offering voters more—and more and more and more—without the pain of tax hikes, is a path to easy victory with few consequences. Which by all appearances, it is, and will be…right up until it isn’t.

It is possible, I suppose, that this cavalier approach to public finance will work out, more or less, that we’ll muddle through, as we usually have, and that the recklessness of the political class will prove merely irresponsible in the usual way, rather than fully calamitous.

And yet. To believe that we should simply respond to the current fiscal situation with a collective shrug requires a belief not only that current levels of debt and deficits don’t matter, but that the inevitable future expansion of the fiscal gap won’t matter either.

Because one thing you can be certain of is that if today’s fiscal frivolity does not produce immediate dire consequences, then the next generation of politicians, Republican and Democrat alike, will push the envelope just a little bit further, and a little bit further after that, and so on and so forth, rather than settling in some comfortable stopping point where the country’s finances are messy but mostly hang together.

Sustaining this casual attitude toward fiscal looseness thus requires believing that there is essentially no limit, no meaningful upper bound, to the amount of debt that the federal budget can sustain, an idea that even many of today’s more sophisticated debt-doesn’t-matter boosters don’t subscribe to. Alternatively, it requires a high degree of confidence that our nation’s political class will more or less responsibly take our national ledger right up to the brink but no further, finding the precise last moment in which to exercise fiscal restrain. If you believe this, I would gently suggest you acquaint yourself with some politicians.

Otherwise, you have to worry, at least a little, that today’s trajectory is toward crisis, if not now, if not at current debt levels, then at some future date we’ll only discover when it’s too late to prevent, when the consequences can’t be avoided. And that worry should be increased a little more by the possibility that today’s free-lunchism is not only increasing the likelihood of an eventual crisis, but making it harder to solve, if and when it does arrive, by seeding amongst voters the idea that hard choices won’t ever be necessary. It is making the already challenging project of achieving public consensus harder still.

So yes, the predicted crisis may not have arrived quite yet. It may even hold off for a while longer. But the nature of politics means it draws ever closer, and ignoring the issue, as we are now, only makes it worse.

Brian Riedl explains the history and, perhaps inadvertently, shows the problem:

Seemingly no one cares about the budget deficit anymore. Republicans recently cut taxes by $2 trillion, while Democrats are promising a spending spree that could top $40 trillion over the decade. And this is on top of the current budget trajectory that shows annual deficits exceeding $2 trillion within a decade, and totaling a staggering $84 trillion over the next 30 years.

The cost of paying interest on this debt is projected to become the largest federal expenditure within a few decades, consuming one-third of all federal taxes. Even that assumes continued low interest rates. Every percentage point they rise adds another $13 trillion in budget interest costs over the next three decades.

In short, an avalanche of debt is upon us. Yet pandering politicians promise even more free lunches, paid for by our kids.

America desperately needs a “grand deal” on deficits, where Republicans and Democrats come together and make the difficult choices to avert a debt-based calamity. We’re all in this together, so everything should be on the table, with no sacred cows.

Such a deal seems wildly implausible. But it has not always been. In a new study, I analyzed the 14 largest deficit-reduction negotiations since 1980. Six of these negotiations successfully led to a deficit-reduction deal, and eight of them failed. Yet the outcome of nearly every negotiation was determined by the same three variables. Satisfying at least two of them always led to a deal. Satisfying one or zero produced failure.

First, there should be a “penalty default” that brings negotiators to the table. This is some painful policy — such as a government shutdown, debt limit default, or deep automatic spending cuts — that would be implemented automatically if a deal is not enacted by a certain date. The 1983 Social Security reforms were motivated by the program’s impending trust fund exhaustion that would bring automatic benefit cuts. The 2011 Budget Control Act was motivated by the need to quickly raise the debt limit and avoid a default on federal obligations.

Today’s challenge is that government shutdowns and debt limits have proven to be increasingly ineffective and dangerous ways to motivate a deal. New penalty defaults are needed to bring lawmakers to the table.

Second, the public must want a deficit-reduction deal. The budget deals enacted between 1985 and 1997 — which helped balance the budget — were driven by voter deficit concerns that made it politically safer for politicians to impose spending cuts and tax hikes. Today, most voters either do not care about the deficit, or are willing to address it in only a partisan fashion.

Third, Congress and the White House must engage in healthy, good-faith negotiations. During the 1995 deficit-reduction negotiations, President Clinton and the Republican Congress attacked each other publicly (even running TV ads against each other) and relied on deception and intimidation to bully the other side into accepting a lopsided deal. These negotiations inevitably failed, leading to a lengthy government shutdown.

Two years later, both sides tried again. Each side honestly laid out their priorities, made generous concessions, avoided hardball tactics, and worked towards a deal in which both sides could claim victory. Neither side relied on leaking to the media or publicly bullying the other. The result was a popular, bipartisan budget deal that was followed by a balanced budget the following year.

This “healthy negotiations” variable was regularly present in the 1980s and 1990s budget negotiations — and has never been present since. That is the lead reason why only one successful deficit-reduction negotiation has occurred in the past 20 years. Republicans and Democrats no longer know how to negotiate with — or even tolerate — each other. And yes, both parties are to blame on that.

Future deficit negotiations also will be more difficult because past negotiations picked the low-hanging fruit. More than half of all savings from past deficit-reduction deals came from discretionary spending (mostly defense) — reducing the discretionary spending share of the budget to less than one-fourth within the next decade. Savings from small entitlement programs, modest tax changes and user fees also have played a role in past deficit-reduction deals.

What’s left? The Social Security and Medicare systems face a $100 trillion cash shortfall over the next 30 years, while the rest of the budget is projected to run a $16 trillion surplus. Closing this gap will require some combination of Social Security and Medicare reforms, and new taxes that include the middle-class. Defense cuts, social spending cuts, and millionaire taxes should be on the table, but cannot close more than a small fraction of that combined $84 trillion shortfall. The math is unforgiving.

This represents a challenge to both politicians and voters. The president and Congress need to get off of Twitter, rebuild relationships and learn to negotiate despite their strong disagreements. The public must also stop demanding more free lunch policies from politicians. After all, the climate change movement focuses on imposing relatively-modest reforms now to avoid calamity later. Imposing modest budget reforms now, before an $84 trillion deluge of debt brings a Greece-style economic calamity, also should be a top priority.

The problems are obvious. The biggest and growing cause of federal deficits are entitlements, specifically Social Security and Medicare, and yet suggesting that reform of Social Security and Medicare is needed is a good way to end your political career.

And yet, tax increases are always the wrong answer. Always. Tax increases, as everyone should know, end up slowing down the economy and make family finances worse. Who therefore should want a fix to federal deficits when the fix makes them worse off?

There are two ways to fix the deficit. One isn’t likely to happen — a constitutional requirement for a balanced budget with no wiggle-outs for alleged national emergencies. The other is a crisis.

 

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