Dubious noises about the always expanding U.S. debt
Republican Sen. Lindsey Graham, the malleable South Carolinian, says the time has come for “a dialogue about how we can finally begin to address the debt.” Finally the time is at last ripe. Which means a Democratic administration approaches.
Graham wants finally to “begin,” as though there has not been, long before and ever since the 2010 Simpson-Bowles commission (the National Commission on Fiscal Responsibility and Reform), abundant serious thinking and specific proposals for bringing government outlays and revenues closer together. What Graham wants finally to begin is a “dialogue,” which is one ofWashington’s two favorite words (the other is “conversation”) to signal protracted solemnity without politically risky actions.
The Manhattan Institute’s Brian Riedl notes that defense spending is not driving deficits: It is a declining percentage of gross domestic product (5.7% in the 1970s and 1980s, 4.6% in 2010, 3.2% today). Deficits are rising not because tax revenues are declining as a percentage of GDP: They have been close to the average 17.3% since 1960.
In 1960, however, just 9% of the population was over 65. Today, 16% is. The great driver of debt is spending on pensions (Social Security) and health care (Medicare).
Economist John Cochrane of Stanford’s Hoover Institution notes that the spending binge will begin “with the same debt relative to GDP with which we endedWorld
War II.” And “then in about ten years, the unfunded Social Security, Medicare, and pension promises kick in to really blow up the deficit.”
Twenty months ago, Laurence Kotlikoff, a Boston University economist, wrote an article in The Hill accurately headlined “Social Security just ran a $9 trillion deficit, and nobody noticed.” In one year, the system’s long-term unfunded liability went from $34 trillion to $43 trillion. The unfunded liability is almost double the national debt. Riedl says that under government projections, by 2050 Social Security and Medicare “will be running an annual cash shortfall of 14.2% of GDP (including interest).” Between now and then, Social Security will have collected $52 trillion in payroll taxes and other dedicated revenues and disbursed $74 trillion in benefits. The $22 trillion gap must be filled from general revenues or by borrowing.
Generations ago, Republicans abandoned their role — which was rarely real — as the party of pain that raised taxes to pay for popular Democratic spending. Now, in an era of low interest rates — actually, or almost, negative — the assumption is that deficits do not matter as long as the interest rate for servicing the national debt remains lower than the rate of economic growth. At long last, for humanity, or at least the American portion, the table has been set for a free lunch.
Remember, there are just two ways to fund a government: current taxes and future taxes.
Complacency about today’s soaring debt, and about rolling over $10 trillion of it annually, requires only the assumption that very low interest rates will (unlike, say, the Roman, Ottoman, British and
Soviet empires) continue forever. So, an old jest is now a fundamental principle: The first law of economics is that scarcity is real, and the first law of politics is to ignore the first law of economics.
If Republicans control the Senate in January, Lindsey Graham will be chairman of the Budget Committee and finally there will be a dialogue about debt. Or a conversation.