Guess What? The Debt Everyone Is Freaking Out About Does Not Exist
Between the new-and-improved Simpson-Bowles plan, Joe Scarborough’s feud with Paul Krugman, the relentless drumbeat of the entire Republican Party, and the media blitzkrieg launched by the billionaire-driven “Fix the Debt” campaign, one might think no serious and responsible American can ignore the unassailable truth: America faces a debt crisis, which we must act on immediately and decisively.
Well, not quite. The actual truth is that the debt everyone’s freaking out about does not exist.
Some of the debt certainly exists, like the roughly $11.6 trillion owed to foreign and private creditors. But that isn’t the debt anyone’s worried about. If we stopped adding to it tomorrow, the debt as it stands would pose essentially zero threat to the country’s fiscal health, as the ongoing growth of the economy would send our debt-to-GDP ratio dropping like a rock.
So the debt that’s got everyone worried is the part we haven’t yet incurred. And that debt, by definition, does not exist. It’s not a certainty, it’s merely a projection by the Congressional Budget Office. And trying to model how the federal budget, not to mention the entire American economy, will behave years or even decades in the future is a devilishly treacherous business.
For instance: one of Rep. Paul Ryan’s (R-WI) favorite talking points in 2011 was that the computer simulations CBO uses to model the economy crash when they attempt to account for the debt load in 2037. Imagine trying to model the 2011 economy in 1985. Things you’d never see coming include (among other things) the Internet, fracking, massive advances in computing power, the renewable energy boom, three wars, a massive recession, and Harry Potter. And predictions can be hard even over shorter time frames. In 1995, CBO predicted the deficit in 2000 would be well over $200 billion. We ran a surplus of $236 billion.
In fact, Ryan plastered dramatic graphs of debt going out 75 years onto everything insight while stumping for his last budget. Forget predicting 2011 in 1985. That’s like predicting 2011 in 1940.
So neither the impending Baby Boomer retirement nor growing health care costs make astronomical debt a certainty, despite the insistence of the conservative and centrist punditariat. With respect to the Boomers, economist Dean Baker ran the numbers and found that if productivity growth in the economy clocks in at one percent until 2035 (avery conservative estimate) the resulting gains will swamp the added retiree burden.
As for health care cost growth, it’s perhaps the best example available to explain why the debt doesn’t actually exist. The Congressional Budget Office (CBO) projects, based on current trends, that excess cost growth will become the lead driver of Medicare and Medicaid spending by 2037 — the primary cause of our long-term debt, and the thing that keeps budget hawks up at night. But if you look at CBO’s fine print (page 60, if you’re interested) their complex formula for making this projection essentially boils down to looking at past trends in health care costs and assuming they’ll be similar going forward.
The catch? The entire purpose of health care reform, whether we keep Obamacare or get Ryan’s preferred replacement, is to change those trends by changing the structure of health care markets — how we buy, sell, and deliver care. That should slow health care cost growth, making it less expensive for the government to pay for health care through Medicare and Medicaid.
But CBO really doesn’t have the tools to model those kinds of structural changes. Its analyses are generally limited to hard spending cuts or revenue increases. CBO Director Doug Elmendorf told Ryan as much during a hearing, which Ryan took to mean his premium-support scheme for Medicare might work better than CBO estimated. But the point applies equally to Obamacare’s reforms, for example.
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.
Yet we’ve already cut non-defense discretionary spending to 40-year lows,endangering all sorts of investments in America’s infrastructure, health, safety, communities, and future productivity. And that’s before the sequester kicks in. This massive failure to invest or aid saps the economy’s skills, education, networks, and future prospects. The longer unemployment and stagnation drags on, the more damage we do to Americans’ abilities to prosper, and the less we’ll be able to grow the denominator over the coming years.
Refusing to tackle that all-too-real crisis with the full range of economic resources at our disposal is a shameful moral and political failure. Especially when the reason we’re refusing is fear of shadows cast on the wall.