Experts: Deficit reduction remains a pipe dream

WASHINGTON — Despite deficits hurtling toward $1 trillion and more for the foreseeable future, Congress is unlikely to make any real effort to pull the red ink back to Earth anytime soon. In fact, it seems that the excess of spending over revenue will probably be even greater than official forecasts.

Another two-year agreement to raise discretionary spending caps, which most observers expect will occur, would increase projected deficits by some $2 trillion over the next decade, based on Congressional Budget Office estimates. Lawmakers might also extend expiring tax breaks, requiring additional Treasury borrowing. Any deal on an infrastructure program would also likely increase spending.

The pessimistic fiscal outlook is based on several factors, including an upcoming presidential election, which usually means Congress punts tough decisions and votes down the road; skepticism about Republicans and Democrats finding common ground on deficit reduction; and fears that a tax increase or spending cuts could tip the economy into a recession.

Another factor might be called the “Chicken Little” effect.

Despite warnings year after year that growing deficits and debt will cause an economic crisis, the economy is strong, inflation and interest rates are low, and there is no indication of a crisis anytime soon.

“The problem is that people have been warning about this for more than two decades, and there have been no economic consequences,” said Tom Kahn, a former longtime Democratic staff director of the House Budget Committee. “As a result, warnings like that run into a very skeptical audience of people who respond that we can continue borrowing without a problem. And those who issue the warnings feel like Chicken Little.”

And while many economists see danger in high deficit and debt levels, not all do. Stephanie Kelton, a former chief economist for Vermont independent Bernie Sanders on the Senate Budget Committee, said worries about a rising deficit and debt are overwrought.

Kelton said that if the deficit were too large, rising inflation would show it. “Since there is no credible evidence of accelerating inflation of the kind that would cause the Fed to worry, for that reason I am not worried about the size of the deficit in the immediate or near term,” she said.

Kelton, a professor at Stony Brook University in New York, dismisses warnings from the CBO and others that, at some point, the debt will become so large that buyers of Treasury securities will lose faith in the ability of the U.S. government to repay its creditors and a debt crisis will ensue.

“It won’t happen, ever,” Kelton said of a debt crisis. She agrees with a 2011 report by St. Louis Fed economists that says the U.S. will never become insolvent because it’s the sole manufacturer of dollars and is not dependent on credit markets to function. In addition, the market for its debt will always exist at home since the U.S. government has the sole power to create risk-free assets valued in dollars, according to Kelton and the St. Louis Fed economists.

For those who believe in reducing the deficit, the difficulty of the task is illustrated by the experience of the last two years.

Republicans have long made deficit reduction a high priority. Yet between 2017 and 2018, when the GOP had majorities in both chambers and with a Republican in the White House, lawmakers not only did not reduce the deficit, the 10year CBO forecast rose by $1.6 trillion, or about 16 percent. That includes the positive effects of higher economic growth forecasts after enactment of President Donald Trump’s tax cuts, among other factors, which helped to temper the deficit increase.