Photo: Richard B. Levine/Zuma Press
Debate Over U.S. Debt Changes Tone
Fights to slash the amount of borrowing are long gone; instead the argument is whether capacity for more has increased
By Nick Timiraos
No matter who wins the White House in November, don’t expect to hear new calls for reduced spending.
Gone are the fights of yesteryear over striking a “grand bargain” to slash the debt. In their place a new debate has emerged over whether America’s borrowing capacity has gone up—and how the nation might take advantage of it.
The top candidates from both major parties have made scant mention of addressing rising long-term deficits and are calling instead for an increase in federal stimulus.
Republican nominee Donald Trump has outlined massive tax cuts and, without getting specific, has promised big federal outlays on infrastructure, border security and an expansion of health-care services for veterans.
The GOP platform calls for a constitutional amendment requiring balanced budgets, but that’s easier said than done, as illustrated by congressional Republicans’ inability to pass a budget resolution this year.
Four years ago, the Democratic Party platform referred seven times to cutting the deficit. The platform that delegates will consider at this week’s convention in Philadelphia doesn’t mention the deficit and pledges to pay for new spending.
The shift on both sides of the aisle is remarkable because it coincides with what economists consider full employment.
The 2012 election turned largely on how Washington would end a series of rolling budget crises. Huge deficits after the 2007-09 recession sparked fears of runaway inflation that would bring higher borrowing costs, choking growth.
President Barack Obama’s re-election didn’t fully resolve the fight by producing one big budget accord. Instead, it led to a series of smaller deals that raised taxes on the wealthy and gradually loosened automatic, across-the-board curbs known as the “sequester.” There was drama along the way. In October 2013, the government shut down for 16 days.
Now, years of curbs on military and domestic programs have pushed the pendulum in the direction of more, not less, spending. Congress and the White House agreed last fall not only to a budget deal that boosted spending but also to extending a series of tax breaks without providing for offsetting revenue increases or spending cuts.
So what accounts for the shifting political dynamic?
First, an expanding economy and the budget agreements of recent years have returned near-term deficits to their long-run averages. Second, health-care cost growth, a major driver of projected deficits, has slowed. Third, markets indicate borrowing costs may be lower for longer than anyone expected just a few years ago amid weaker global growth prospects.
The national debt as a share of gross domestic product has more than doubled since 2007, to around 75%, but net interest payments on the debt have actually declined. They fell to 1.25% of GDP last year, the lowest level since 1968.
Long-term deficits haven’t gone away, of course. The Congressional Budget Office this month said the national debt was on track to exceed the total output of the economy by 2033, six years earlier than last year’s forecast. The change was largely due to last year’s policy changes.
Also, a rising share of federal spending will be on autopilot as more retirees become eligible for Medicare and Social Security, whose spending isn’t appropriated annually by Congress. The current low-rate environment “offers a false sense of security,” said Michael Peterson, president of the Peter G. Peterson Foundation, a group that pushed for deficit reduction.
Still, the shifting political consensus echoes a similar rethink among some economists who say that stronger demand from abroad for U.S. Treasurys could keep interest rates lower for longer.
That would boost the case for tolerating higher debt levels, said economists Doug Elmendorf, who headed the CBO from 2009 until 2015, and Louise Sheiner of the Brookings Institution, in a paper in February. They argued any boost in spending should go toward policies that raise slumping labor productivity to lift economic growth.
When interest rates fall below economic growth rates, governments can borrow while still holding down the debt-to-GDP ratio. Low rates may present the U.S. with such an opportunity.
“Extraordinarily low interest rates makes the economics of public investment profoundly different than it appeared a decade ago,” said Larry Summers, an economist at Harvard University and former U.S. Treasury secretary.
Mr. Summers has warned of “secular stagnation,” a chronic deficiency of investment that leaves the world stuck in a low-growth rut. But even if he’s wrong, aging workforces in Europe and Japan and other global developments that boost foreign demand for Treasurys mean the U.S. could remain “in a low-interest-rate, high-saving, challenge-of-absorbing-savings world for at least years to come,” he said.
None of this means the U.S. will escape long-run, demographic-driven spending challenges. But it could buy the next president a little more breathing room.