Fiscal Responsibility Does Not Require Eliminating the Debt

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In an interview with Bob Woodward of the Washington Post, Republican presidential front-runner Donald Trump estimated last week that he could pay off the nation’s $19 trillion debt within eight years.

In an interview with Bob Woodward of the Washington Post, Republican presidential front-runner Donald Trump estimated last week that he could pay off the nation’s $19 trillion debt within eight years.

This claim demonstrates a basic misunderstanding of the debt and its impact on the economy. It is also inconsistent with the tax and spending proposals Trump has espoused on the campaign trail, which are far more likely to grow the debt rather than eliminate it.

What’s important about the debt is not its size in dollar terms but its size relative to the economy (GDP) and whether it is on a sustainable path. While the debt is indeed very high by historic standards and is projected to grow at an unsustainable rate over the coming decades, there is no need to eliminate it within eight years. Attempting to do so, however, would require spending cuts or tax increases that risk substantial harm to the economy.  

A better goal would be to stabilize the debt as a share of the economy and then begin to reduce it over time. That is what happened following World War II when the debt in 1946 was $242 billion or 106 percent of GDP. By 1974, the debt had grown in dollar terms to $344 billion but had shrunk to 23 percent of GDP — the post World War II low.

Moreover, no plausible set of policy options exists for eliminating the debt. Budgets proposed by both President Obama and House Republicans require varying amounts of higher debt in dollar terms while gradually reducing the debt as a share of the economy. The same is true of the model bipartisan plans recommended by the Simpson-Bowles commission and the Domenici-Rivlin task force.

One bit of good news for Trump is that there is less debt to eliminate than he thinks. In targeting the nation’s total debt ($19 trillion) he has not distinguished between two very different components of that debt.

One component is “debt held by the public” — debt held by individuals or an entity that is not the federal government, such as a mutual fund, a municipal government or a foreign government. This component of the debt currently stands at $13.9 trillion.

The other component is “intragovernmental debt” — debt the government owes to itself, such as money credited to the Social Security Trust Funds, the Medicare Hospital Insurance Trust Fund, and the Civil Service Retirement and Disability Fund. This component of the debt currently stands at $5.3 trillion.

Because debt held by the public flows through financial markets, it has more immediate relevance to the economy than intragovernmental debt, which is a matter of internal bookkeeping.

In fact, the only way to eliminate intragovernmental debt over eight years, other than just writing it off, would be to increase expenditures for the trust fund programs, thus drawing down the funds credited to those accounts.

For example, one could eliminate the Social Security Trust Fund debt by initiating a large, immediate, and temporary increase in benefits for current beneficiaries regardless of its effect on the budget or the retirement security of future generations. The trust fund “debt” would be gone but the required policy action would be totally irrational.

The more economically meaningful debt held by the public would stand in excess of $14 trillion by the time of a hypothetical President Trump’s first budget submission. Eliminating that would still be a daunting and needless exercise.

For one thing, paying off the debt would require that the federal budget start producing annual budget surpluses. Accomplishing that goal over the eight-year period Trump would serve if he were a two-term president would be a very heavy lift by itself.

The Congressional Budget Office projects escalating deficits during those years totaling $7.4 trillion. So the first thing President Trump would have to do would be to cut enough spending or raise enough revenue to close the gap; in other words, to stop digging the hole.

That task, difficult enough given the budget’s structural deficits due to an aging population,  would be made all the more difficult if Trump remained true to two other campaign promises: Enact a tax cut, which has been estimated at costing $8 trillion over eight years, and make no cuts in Social Security and Medicare, the government’s two largest and fastest-growing programs.

Placing Social Security and Medicare off-limits would place more pressure on the rest of the budget for cuts. For perspective, the House Republican Study Committee’s proposed budget, which aims to balance the budget over eight years, uses around $600 billion of cuts to Medicare and Social security to achieve its goal.

In total, Trump would loosely need to pay for $15 trillion in deficits over eight years from current laws, including growth in Medicare and Social Security, plus his tax-cut proposal — just to keep the debt hole from getting bigger. Zeroing out all appropriations, defense and non-defense alike, over the eight years would only save $10 trillion. More savings would be needed before he could begin to eliminate the $14 trillion in debt held by the public.

The precise math is not as important as the likelihood that attempting to run budget surpluses large enough to eliminate the debt would not only devastate important government services but also have a highly contractionary effect on the economy.

There is no question that tough choices need to be made to put the nation’s budget on a sustainable footing for future generations. The sooner that happens the better. However, choosing a fiscal policy goal, such as eliminating the debt within eight years, that is implausible, unnecessary and economically unsound does not advance a realistic dialogue on solutions.  


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