Don’t panic — and please don’t feed the debt scolds

In March 2011, Erskine Bowles and Alan Simpson, chairs of a White House deficit-reduction commission, issued a frightening warning about U.S. government debt. Unless America took major steps to rein in future deficits, they warned, a fiscal crisis could be expected within about two years.

Bowles described what he thought would happen: Foreigners would stop buying our debt. And then, he asked, “What happens to interest rates? What happens to the U.S. economy? The markets will absolutely devastate us.”

That was 12 years ago.

At the time Bowles issued his warning, the interest rate on 10-year U.S. bonds was about 3.5%. Not much was done to reduce deficits, aside from a squeeze on discretionary federal spending that probably delayed economic recovery. But at the end of last week, the 10-year rate, which has gone up substantially over the past year as the Fed raises rates to fight inflation, was … about 3.5%.

The point is that in the early 2010s, the last time we faced a potential crisis over the debt ceiling, there was an elite consensus that budget deficits were a severe threat. This consensus was, in retrospect, wrong. Yet, it almost completely dominated the political conversation, to such an extent that, as Ezra Klein pointed out, the media abandoned the normal rules of reportorial neutrality and cheered proposals to cut Social Security and Medicare.

Those of us who challenged the elite consensus, mocking the peddlers of debt panic as Very Serious People (because ranting about the evils of debt sounds serious and responsible, even when the math doesn’t support the rhetoric), were treated as out of touch.

Now, the Very Serious People are trying to make a comeback, in effect lending cover to Republican efforts to hold America hostage by refusing to raise the debt ceiling. So, it’s important to realize that the case for debt panic is, if anything, even weaker than it was in 2011.

It’s true that U.S. debt is large — $31 trillion (said in your best Dr. Evil voice). But America is a big country, so almost every economic number is very large. A better way to think about debt is to ask whether interest payments are a major burden on the budget. In 2011, these payments were 1.47% of gross domestic product — half what they had been in the mid-1990s. In 2021, they were 1.51%. This number will rise as existing debt is rolled over at higher interest rates, but real net interest — interest payments adjusted for inflation — is likely to remain below 1% of GDP for the next decade.

This doesn’t sound like a crisis. But what about demography?

Well, aging is an issue. But about two-thirds of the baby boomers, born between 1946 and 1964, have already reached the age of Medicare eligibility. Further aging will place additional demands on the budget, but we’re talking about only a few percentage points of GDP.

So, why do we often hear about grim fiscal projections? These projections are only partly driven by demography; they largely reflect assumptions about rising health care costs and interest rates that have in the past proved much too pessimistic.

The Congressional Budget Office regularly issues long-term budget projections, which are often cited in fiscal debates. My guess, however, is that few people are aware of how much less dire these projections have become. In 2011, the budget office projected that under what it considered the most realistic scenario, federal interest costs in 2021 would be 4.4% of GDP — more than twice their actual level. It also projected that by 2035, federal debt would reach 187% of GDP. Its most recent projection puts it at 117%.

Now, fiscal surprises aren’t always positive — who predicted the huge costs associated with COVID-19? — and I’m not arguing that government debt can never be a problem or that our long-run fiscal position is perfectly OK. But if you’re concerned about America’s long-term future (as opposed to being Very Serious), you should be thinking about multiple issues, from infrastructure to child poverty. In terms of priorities, federal debt should be down the list.

Nonetheless, the debt scolds are trying to make a comeback. Partly, that’s because, ranting about federal debt sounds serious. Partly, it’s because deficit rants are all too often deployed in the service of an ideological agenda, a push to cut Social Security, Medicare and Medicaid (but not, of course, giving the IRS the resources to crack down on tax evasion).

Here’s my proposal: Let’s not do 2011 all over again. Let’s not assume that deficit peacocks are doing anything more than posturing. And let’s not allow the media to become, once again, a de facto accessory to an ideological, partisan agenda.