July 14, 2013 7:43 pm
Simpson and Bowles are wrong on US debt
The deficit hawks were mistaken before 2008 and they remain so
Even before the 2008 crisis, America’s deficit hawks were warning the US was heading the way of Greece. They were wrong then and they are wrong now. It is time for them to whistle a different tune.
According to the independent Congressional Budget Office, America’s national debt will fall to 71 per cent of gross domestic product by 2016 – barely a third the level of Japan’s and roughly half that of Europe’s Mediterranean countries. Because of rising revenues and the impact of steep cuts from sequestration, this year’s US fiscal deficit will halve to $642bn from $1.1tn in 2012. By any measure, this is a vertiginous drop. At 4 percentage points of GDP, the salient worry is whether it is falling too rapidly.
Yet Alan Simpson and Erskine Bowles – the retired politicians who lead the “fix the debt” movement – remain as unwavering as before. Given such rectitude, perhaps their motto should be: “When the facts change, we do not change our minds.”
But that looks to be an increasingly long way off. Even at the depths of the Great Recession, when the budget deficit was soaring – as it should have – rising national debt always posed a medium-term rather than a short-term threat.
In an ideal democracy, US legislators would by now have taken steps to curb healthcare and retirement costs to prevent a crisis from occurring 15 to 20 years from now. But politicians think on shorter time horizons.
This is particularly true of the US, where the system is rigged to address emergencies only when they are already upon it. It would be better were that not so. But as politics stands, Mr Simpson and Mr Bowles would have a better chance of curing America’s obesity problem than cajoling Washington to address tomorrow’s debt crisis.
Nor do the debt scare stories sound particularly frightening. According to the Committee for a Responsible Federal Budget – the most vigorous advocate of fixing the debt crisis now – the Social Security trust fund is set to go bankrupt in 2033, which means that benefits “will be cut automatically by 23 per cent across the board”. Set against today’s domestic cuts, which are also in double figures, the Social Security crisis looks like a picnic – and a hypothetical one at that. Without irony, the committee warns that by 2087 the Social Security deficit, if unaddressed, could equal 1.64 per cent of GDP. By then barely any of today’s voters are likely to be alive. My six-year-old daughter will be nudging 81.
A good guess is that the electorate will have forced a more solvent trajectory roughly half a century before that. No doubt, it would be cheaper for the US to raise the retirement age now. But in Washington that is only likely to happen when exigency demands.
The deficit hawks – or what Jared Bernstein, the former White House economics adviser, calls the “hair on fire” brigade – are on much stronger ground when they warn of rising US healthcare costs, particularly the Medicare programme for the elderly. Without any change in the nearer term, Medicare could swallow up all of the federal budget by the 2040s.
Again, that is some way off. But the mounting costs of caring for the baby boomers are already eating up a growing share of today’s spending on other generations. The sooner the US puts a brake on the costs of Medicare, the more money it will have to invest in tomorrow’s priorities.
Mr Bowles and Mr Simpson did everyone a favour three years ago when they came up with a plan to restore order to the US budget. Their idea of broadening the tax base and eradicating loopholes would be sane with or without a debt problem. There is also something admirable in the lengths to which they go to publicise their cause. In December, the 81-year-old Mr Simpson even danced “Gangnam style” on YouTube – all six foot seven inches of him. “These old coots will clean out the Treasury before you get there,” he warned his “millennial audience”.
And so they might. But with the exception of America’s richest 1 per cent, no other income group rates the US budget deficit among the country’s biggest threats, according to polls. The remainder rank unemployment and stagnant incomes as bigger problems. To be fair to the 99 per cent, their concerns look more real. Can it really make sense to worry more about possible cuts 20 years away than actual pain today?
Copyright The Financial Times Limited 2013.