Debt Warnings Based on Experience

Blog Post
Monday, July 23, 2018

Ben Bernanke, Henry Paulson and Timothy Geithner played central roles in dealing with the financial crisis 10 years ago that stunned the nation and threatened economic disaster.

The three former policymakers recently discussed some of the lessons to be learned from that crisis and how the country could best protect itself from similar crises in the future. While it was a wide-ranging discussion, all three men warned that rising federal debt posed a particularly worrisome vulnerability to the country.

This warning deserves close attention in Washington, where the Trump administration and lawmakers in both parties are ignoring or dismissing deficit concerns even as the projected shortfalls worsen.

Bernanke served as chairman of the Federal Reserve during the financial crisis a decade ago. Paulson was Treasury secretary in the George W. Bush administration, and Geithner held that job in the Obama administration. The three recently shared their views with about a dozen journalists at the Brookings Institution.

In his remarks on the deficit, Paulson said, “If we don’t act, that is the most certain fiscal or economic crisis we will have. It will slowly strangle us. . . . It will squeeze out all sorts of things we need to do.”

Projections from the Congressional Budget Office (CBO) show interest costs on the federal debt doubling as a percentage of GDP over the next decade as more debt accumulates and interest rates rise to more traditional levels.

This would crowd out other budget priorities, particularly as Washington struggles to provide services for an aging population and to deal with rising health care costs.

High government debt could also impair the government’s ability to respond to financial or economic crisis such as the Great Recession.

In recessions, the government generally spends more to stimulate the economy and provide various forms of assistance to individuals, families and communities that are hard hit, as Washington did during the Great Recession and its aftermath.

In addition, an economic downturn reduces government tax revenue as businesses struggle and individuals lose jobs or take pay cuts.

All this calls for additional government borrowing. But if federal deficits and debt are already high by historical terms -- as they are today -- such borrowing could potentially become quite difficult and expensive.

Geithner emphasized this point, suggesting that the government now has less room to pump up economic demand than it did during the last crisis. In addition, he noted, the Federal Reserve has less leeway than it did a decade ago if it needed to lower interest rates to help support an economic recovery.

Bernanke lamented the consequences of rapidly rising deficits and criticized the latest deficit-financed tax cuts and spending increases as poorly timed, coming at a time when the economy was at or near full employment.

Geithner also had a timing concern: He said deficit worries prevented the government from doing more years ago to speed up the economic recovery, and he thought large deficits are too readily accepted today.

“I think the deficit fever of ‘09 through ‘13 was mistimed,” he said.  But he added: “I say the new complacency about the larger deficits is mistimed, too.”

Paulson said that today’s economic growth makes this the time to deal with the federal deficit and other “persistent structural issues that are going to determine our long-term economic competitiveness.”

The Concord Coalition has long made similar arguments. While federal deficits may be necessary to help pull the country out of recessions, it is irresponsible for the government to be running large deficits -- let alone raising them -- during strong economic times.

This irresponsibility is certainly on display now. Just this month, for example, the Trump administration updated its budget plan to show deficits of more than a $1 trillion in each of the next three years, even under quite optimistic assumptions.

Lawmakers and some candidates for Congress, too, have joined in what Geithner calls “the new complacency” about higher deficits.

They would do better to heed the warnings that he, Paulson and Bernanke have given and start using a strong economy to reduce deficits rather than increase them.