What the deficit means

The last column in this space (“Where are the adults in D.C.?” Feb. 28-March 12 NH Business Review) described the growth of the federal deficit and decried the lack of apparent concern in Washington and on the campaign trail about it. While the political landscape seems to have shifted significantly since that column was written, discussion of the debt and deficit has not.

The question arises, then, as to why we should worry about the deficit and the debt if politicians seemingly do not focus on it. While my suspicion is they do not want to deal with it, since it is such a large and unappealing subject, I decided to consult with expert deficit and debt hawks.

The Concord Coalition (concordcoalition.org), a national organization
founded and funded by the late Pete Peterson, the founding co-chairs of which were the late senators Warren Rudman (R-NH) and Paul Tsongas (D-Mass.), has been pointing out the dangers of expanding debt since the early 1990s.

I asked Bob Bixby, the coalition’s executive director, about how much debt is too much and why deficits matter.

To the first question, he replied, “There is no consensus among economists on when deficits or debt reach a tipping point. A lot depends on the context. What is the level relative to the economy? Is the level stable or rising? Is new debt being used for investment or consumption? Is the economy in recession or recovery? While there is no defined tipping point, current circumstances are not consistent with prudent use of new public debt.”

He said that the nation’s level of debt — 80% of GDP — is at its highest level since the end of World War II, and “it is rising rather than stable, and “most of the new debt goes for consumption rather than investment.”

In addition, he said, “the economy is in a record stretch of sustained growth. Growing debt in such circumstances is unprecedented in the U.S.,” and because “we’re in uncharted territory,” the nation “is running a real-time experiment in finding out what the tipping point is. It’s a little like ordering more rounds at the pub to find out when you’ll pass out.”

As for the second question, he said, “From an economic perspective, the argument has always been that the need to finance big government debt ‘crowds out’ private sector investments and results in a less productive economy over the long-term.”

But, while that “economic theory remains valid,” he added, “persistently low interest rates over the past several years signal that other factors are at play. Instead of crowding out, there is a worldwide savings glut. Moreover, in a flight to safety, many investors from around the world are happy to lend us money at low rates. The old crowding out theory is thus taking a less prominent role in the argument on why deficits matter (although this is likely a passing phase).”

The bottom line, he said, “is that whether or not deficits are ‘affordable’ in the short-term, our growing debt will limit the economic and budgetary choices of future generations (including those already in the workforce and old enough to vote). Deficits are, in effect, a generational wealth tax with little prospect that the forward transfer of wealth will benefit those footing the bill.”

That is a great summary from the expert on the subject. It is clear that this is not a simple matter. It is also clear that at a time of record low interest rates, politicians have been lulled to sleep and if interest rates jump, there is going to be a serious wake-up call. If there is $20 trillion of debt (and there is more as was shown in the last column), for each increase of 1% in interest, the federal budget would have to increase by TWO HUNDRED BILLION DOLLARS each year just to service the debt.

To put that in perspective, the interest rates in the early 1980s were in the mid-teens, and the entire federal budget did not reach $100 billion per year until Lyndon Johnson’s Great Society in the 1960s.

So the issue is important, should not be ignored, and the politicians in Washington should address it now, not later.

Brad Cook is a Manchester attorney. The views expressed in this column are his own. He can be reached at bcook@sheehan.com.