November 28, 2014

Economic Recovery and Other Uncertainties Are No Excuse For Failure to Plan A More Responsible Fiscal Course

How large is the federal debt? That's something of a trick question in economic circles, and some analysts believe it may have already tripped up the President's fiscal commission.

Some commission members think the panel, charged with recommending solutions to the nation’s fiscal problems, should focus on the total federal debt. That figure, which just hit $13 trillion, is most familiar to the general public because it is widely cited by the news media and politicians.

Many budget experts and economists, however, say the real number to watch is “publicly held debt,” meaning what the government owes to investors. This figure, now approaching $8.6 trillion, does not include money that the government owes to various trust funds, notably for Social Security.

Beyond this issue is the question of how much more debt the government can safely take on. Fiscal commission members tussled over that at their second full meeting late last month on Capitol Hill, with some arguing that the economy was still too weak for the government to start focusing on deficit reduction.

“It’s very important that we don’t in our zeal focus on deficit reduction right now,” said Rep. Jan Schakowsky, an Illinois Democrat.

Regardless of which figure the commission focuses on, federal debt is high by historical standards and heading even higher at a rapid pace. And as a general rule, high debt carries big risks -- as can be seen in everything from the collapse of the U.S. housing bubble to the financial and social turmoil now shaking Europe.

No one can say for sure how much higher the U.S. government’s debt can go without seriously jeopardizing the country’s economic future. That would require a crystal ball to tell us how the American economy will fare in the years ahead, how the global economy will do, what will happen to interest rates, whether spiraling medical costs can be brought under control, what new military or environmental challenges the United States may face . . . . The list goes on and on.

But this uncertainty shouldn’t be an excuse for inaction, as some analysts seem to suggest.

An analogy might be speeding down a narrow, winding country road at 80 miles an hour. Since nothing catastrophic has happened yet, can we push it up to 90? To 100? It’s hard to say for sure because we don’t know what’s around the next bend. But we do know that at such high speeds, we will have little time to react to unforeseen circumstances. So at some point, easing up on the accelerator would be a wise thing to do.

Some debt hazards, though, are easy to see coming. Right now, extremely low interest rates are holding down borrowing costs for the government. Everyone knows those rates won’t stay this low forever. When they start rising, more and more tax dollars will have to be devoted simply to interest payments.

Reasonable people can differ on how quickly the government should start reducing deficits while the economy is still shaky. But Washington should at least start developing a credible plan to deal with the basic structural problems in the federal budget that are projected to produce massive deficits even in good economic times.

Regardless of whether people are talking about total federal debt or just “publicly held” debt, two inter-related points should be kept in mind:

Neither of these figures include tens of trillions of dollars in federal liabilities for the big entitlement programs, liabilities that far exceed any trust fund reserves. The projected costs of Medicare are particularly daunting because of rising medical costs and the aging population. To solve the country’s long-term deficit problem, it must figure out how to curb Medicare spending.

Even if the entire federal debt were magically paid off today, the country would still need to make sweeping changes in spending programs as well as tax policy. “We would start with a clean slate,” says Diane Lim Rogers, Concord’s chief economist, “but right away our debt would start accumulating again – because the dynamics of the fiscal outlook would still be all wrong: promised entitlement benefits would still be growing too fast for the economy and revenues to keep up.“

So however the fiscal commission decides to tally up the government’s debt, it should focus on developing credible recommendations to ensure that the debt doesn’t get completely out of hand in the years to come.