'A Fairly Ugly Picture': the Economic Risks of Current Fiscal Policy

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The American economy is at risk for a variety of reasons: high and rising federal debt, mounting interest and health costs, recent tax and spending decisions, and widespread complacency — in Washington and around the country — about the difficult fiscal challenges ahead.  

These critical problems were examined and lamented in a recent panel discussion entitled “Dangers of Debt: How Our Fiscal Outlook Threatens the Economy.” The program was part of the Peter G. Peterson Foundation’s 2018 Fiscal Summit in Washington.

Although deficit hawks have long warned about the dangers of fiscal irresponsibility, the panelists said these dangers were worsening.

“I think it is more dangerous than usual because we are going into trillion-dollar deficits at . . . the late stages of a recovery cycle,” said Steven Rattner, chairman and CEO of Willett Advisors. Under conventional economic thinking, governments should take advantage of a recovery to reduce deficits rather than increase them.

Rattner also noted that in the past, deficits were generally projected by nonpartisan organizations such as the Congressional Budget Office to go down eventually. Now, however, projections show trillion-dollar deficits “as far as the eye can see.”

He added: “So I think all of that paints a fairly ugly picture.”

Other panel members were Deanna Mulligan, president and CEO of The Guardian Life Insurance Company of America, and Simon Johnson, a professor at the MIT Sloan School of Management. Greg Ip, chief economics commentator for The Wall Street Journal, served as moderator.

There was considerable agreement among the panelists in many areas, including their deep concern about the country’s current fiscal course and the possible risks of that course both in the near future and the long term.

Rattner said he was troubled both by the size of the federal deficit and how the money was being used. He criticized legislation that over the last three years accounted for most of next year’s projected deficit of nearly $1 trillion. “So I think that, as a whole, was a set of pretty irresponsible policy actions,” he said.

Mulligan spotlighted the government’s rising interest costs and worried that they would crowd out productive government spending.

“Because if you think about our GDP in simple terms, it’s number of people times productivity of people,” she said. “And as we seem to be heading toward policies that restrict immigration, we have to make people more productive if we want GDP to grow. There needs to be a lot of investment in education and building up our labor force.”

Johnson said the U.S. economy has “extremely good fundamentals” but Washington had become overly dependent on borrowing from other countries. With a note of frustration, he added: “We didn’t used to do this. We didn’t have to do this.”

Johnson worries that there is “no political will” to use appropriate counter-cyclical fiscal policy, which would mean running significantly lower deficits in a strong economy. This lack of will, he said, is “very scary because that — over time — adds up to a very dangerous position for us.”

There was also discussion of when and how financial markets might react to the country’s rising debt.

Rattner said: “I think the question I often get asked is, ‘When are the markets going to react to this and understand this level of debt?’ And I think I worry about two things. I worry about the possibility that the markets will react to this and we’ll have a credit crisis of some sort — and I worry about the possibility that the markets won’t react to this and we’ll simply go on for the next 10 years without the markets ever revolting, so to speak.”

The problem with this second scenario, the panelists agreed, is that it might allow dangerous fiscal pressures and economic risks to continue to grow for years.

Referring to her insurance company, Mulligan said: “We, too, see that there is a possibility that the debt markets might not recognize this in the short term and that . . . a lot of pressure could build up for the long term.”

Johnson had this warning: “Increasingly, frankly, our fate is not in our hands. Because whether there is an impact on bond markets, for example, depends on whether other countries around the world choose to run a current accounts surplus and invest, overall  . . . those proceeds in our U.S. government debt.”

The panelists were not optimistic about the prospects for fiscal reform within the next few years, absent some sort of budgetary or economic crisis.

As The Concord Coalition often points out, however, it would be folly for the nation to wait for a crisis to adopt more responsible fiscal policies. That would virtually guarantee that the political choices would become more difficult and the necessary changes more painful.

Putting Washington’s financial house in order, on the other hand, could boost economic growth, ensure more good-paying jobs, increase investor confidence and protect U.S. living standards.

The Concord Coalition receives financial support from the Peterson Foundation.


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