Guess What? The Debt Everyone Is Freaking Out About Does Not Exist
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In other words, the general assumption within the Beltway — that we’ll write legislation, the CBO will tell us it solves the problem, then we’ll pass it and the problem will be solved — gets it backwards. The central debt problem of growing health care costs is something CBO probably can’t tell us whether we’ve solved until we’ve already solved it. Case in point: CBO just significantly downgraded its projections for Medicare and Medicaid spending over the next decade, precisely because growth in health care costs has unexpectedly slowed to a 50-year low since 2009. A big part of the slowdown is the recession, and so probably temporary, but lots of economists think a big part is also durable, structural change to health care markets. We probably have Obamacare to thank for that.
It should be said that this situation certainly isn’t CBO fault. They’re a sober organization well aware of their own limits, and regularly try to remind us ( page 59) that even without policy changes, “actual spending for health care could be much lower or much higher than the figures contained in CBO’s and other analysts’ projections.” We just never pay attention. And as a consequence, we’re currently obsessing over a problem that might not exist.
But doesn’t uncertainty cut both ways? Like CBO said, spending could be much higher in the future — suppose, for example, we fight a war with Iran. That sort of unpredictable policy shift could make the future debt even bigger than CBO currently projects.
Well, it’s not all that clear that’d be bad: contrary to popular belief, there’s no magicdebt-to-GDP ratio that would trigger an economic crisis. Japan, Britain, and Francehave all carried far larger debt burdens than ours for extended periods of time without calamity arriving. America’s own borrowing costs are lower now than in the 90s, despite lower debt then. And because we control our own currency, it’s not even clear that the United States could ever suffer a debt-induced economic collapse. We could eventually run ourselves into high inflation, presumably, but we have more than enough room to maneuver there as well.
By fixating on a problem that may or may not exist, Washington has trapped policymaking in a weird, postmodern dilemma. We’ve declared there’s a crisis because we’ve produced a hypothetical number, tethered to reality only by a host of assumptions and guesswork about what will happen in the next several decades. Then we insist this “crisis” isn’t “solved” until we’ve made policy changes that shift the math designed to spit out said hypothetical number. Policymaking becomes less about solving concrete problems (more on that in a bit) and more about made-up numbers on an Excel spreadsheet.
This choice to prioritize a phantom number over real-world evidence has consequences. In a depression, spending cuts suck demand out of the economy, leading to slower growth. Remember: the denominator counts as much as the numerator in the debt-to-GDP ratio. Europe has so far pursued austerity with markedly more enthusiasm than the United States, and its economic performance predictably tanked as a result. Spain and France are anticipated to miss their latest debt-cutting targets, and the Continent as a whole will probably not see renewed economic growth for another year.
Both in Europe and here in America, we have tax codes that by their nature bring in less revenue when the economy goes into a downturn, and a series of safety net programs designed to ramp up when unemployment rises. The vast majority of the deficits we’ve seen since President Obama took office were due to the 2008 collapse. Under depression conditions, deficits are a feature, not a bug.