The Big Question: Is America Headed For a Debt Crisis?
(Bloomberg Opinion) -- This is one of a series of interviews by Bloomberg Opinion columnists on how to solve today’s most pressing policy challenges. It has been condensed and edited.
Karl W. Smith: The last four years or so have been tumultuous on fiscal policy. We had a deficit-financed tax cut by a Republican Congress and Republican president, followed by an equally significant deficit-financed spending increase by a divided Congress and that same president. And of course, we’ve had these three massive COVID relief bills. Now the Biden administration is talking about two more very large spending bills.
You’re the president of the Committee for a Responsible Federal Budget, a non-partisan organization that has long warned that the size of the national debt is unsustainable. How would you assess the U.S.’s fiscal situation relative to what it’s been in the past? And where is it likely to go?
Maya MacGuineas, president, Committee for a Responsible Federal Budget: The first point is, we were on a dangerous fiscal path before we got hit with this crisis. Danger is basically signaled when your debt is growing faster than your economy. We’ve been on that trajectory for quite some time, driven primarily by an aging population and healthcare costs — things that we could have addressed at any point, but for political reasons failed to do so. Second, interest rates have been stunningly low in recent years, which has given people who don't want to have to worry about how you pay for things a pretty good reason to say, “Hey, nothing to see here, there’s nothing to worry about.” Third, as you said, before Covid we had a huge tax cut that was not paid for, followed by two huge spending increases that were not paid for. And then on top of that there was another $500 billion tax cut. So that’s about $4.7 trillion in new borrowing in the three years before COVID hit when the economy was strong, which is exactly when we should be bringing the debt down.
Then Covid comes. That is when you should be borrowing. Luckily, we’re able to because we have the reserve currency. But this moment has basically numbed people to understanding how big an amount we’re adding to the debt. Billions have seamlessly turned into trillions. Nobody knows what either one of them means. Even as we’re coming back into a strong economic position, it seems easier than ever to throw around things with massive price tags. $2.7 trillion for [President Joe Biden’s] infrastructure bill is unheard of. It’s six to eight times as much as both Clinton and Obama were suggesting in their proposed infrastructure bills. This is massive, and I think the country has become numb to both the cost of things and the idea that if you borrow this much, it’s going to lead to some pretty painful economic situations down the road.
KS: An argument that’s been articulated by Larry Summers and Olivier Blanchard is that we’ve seen interest rates falling over these decades, which means that we shouldn’t be as concerned as we once were about the effects of deficits on the economy. We’ve run persistently high deficits and yet have seen nothing approaching the kind of spiking interest rates that could cause a debt crisis. What do you think of that argument?
MM: Big picture, I agree with them. It turns out we had more fiscal space than we thought, and thank goodness — because otherwise, we could already have been in more trouble than we are. One of the things about the effects of the deficit is you don’t actually see them. But as a result of the many years and decades of borrowing, our standard of living is lower today than it otherwise would have been. We are already paying the price for the borrowing so that people didn’t have to pay for their past consumption. And that will continue forward to our kids. We do have more room before the markets force us to pull back, but that doesn’t mean we should be intent on finding out where that limit is. It’s like if you’re blindfolded walking up to the edge of a cliff, stop walking! Don’t find out where that last point is, and don’t push us into a situation where markets do start to lose faith in the U.S. government and the foreign lending that’s readily available at low rates starts to dry up.
KS: Do you think a sovereign debt crisis is possible? There are a lot of people who argue that because the dollar is the world’s reserve currency and we print our own money, a U.S. sovereign debt crisis is impossible. What’s your take on that?
MM: What’s not going to be the problem is that we default, because we do borrow in our own currency and we can print. But the problem is all the collateral damage that comes from that: the economic risks of higher interest rates, inflation, of losing our enviable currency role in the global economy, the geopolitical vulnerabilities that come with depending on other nations to finance our debt, including nations like China that we aren’t completely aligned with. The biggest issue is that this leaves a younger generation — who already will have much larger interest payments and a huge debt load — even less ability to borrow for their own priorities because we didn’t want to pay for things. And every single indication is that they are going to have many more challenges on their watch than we’ve had on ours.
KS: A lot of conservative economists say that the real issue is entitlements — and that unless we have some agreement on entitlements, it’s pointless to concede to tax increases, because there’s this looming problem that needs to be dealt with first. Is it rational for Republicans to say, well, we’re just not going to budge on taxes until Democrats get serious on entitlements?
MM: Entitlements are structurally the biggest challenge we face. But no, that does not let Republicans or anyone else who supported tax cuts off the hook. I’m a political independent. But to generalize, Republicans have been completely irresponsible and hypocritical in having multiple unpaid-for tax cuts while claiming they care about the debt. At the same time, Democrats, with exceptions, have been incredibly disingenuous in trying to pretend that the problems of spiraling entitlement costs aren’t real. And by delaying those changes, which we absolutely have to make, they have been putting the people who depend on those programs in jeopardy. Thank goodness there are members of both parties who do care and put policy before politics and country before party. I just wish there were more.
KS: Are there politicians that you’d be willing to name who you think are doing a good job on this?
MM: There are two efforts that I think are really worth noting. There’s the Trust Act, which is made up of a number of bipartisan, bicameral members who have said that if a trust fund is headed for insolvency, we should have a special committee that’s going to work on coming up with answers, so we can’t have reckless delays on Social Security reform or Highway Trust Fund reform. That’s Mitt Romney, Joe Manchin, a couple folks in the House on both sides who are really doing good work. And there’s an effort called 30 and 30, which is 30 Democrats and 30 Republicans in the House led by Jodey Arrington of Texas and Scott Peters of California. They said, we understand we need to borrow for this Covid crisis and we also understand the debt is a big problem. So let’s borrow now but then let’s turn our attention to figuring out how we’re going to put in a realistic approach to bringing the debt to where it’s a little bit more manageable. I think that’s exactly the kind of effort that needs to happen.
KS: Is the choice between tax increases and spending cuts purely political? A lot of Republicans would argue that the weight should be on spending cuts, because if you increase taxes, you reduce the very tax base that you’re trying to use to pay down the debt. Obviously, that doesn't sit well with a lot of Democrats who think that we need major investments. Is this just a political split? As somebody thinking about the debt itself are there any principles that you would put forward?
MM: Our goal should be to pick as big a savings package as is doable, meaning picking the low-hanging fruit on both sides. Let’s say we decided we wanted to offset the costs of the $1.9 trillion emergency package that we passed in January. I can see a package that said, let’s look at re-applying discretionary spending caps, which have been very useful. Let’s partner that with pay-as-you-go, where every new initiative needs to be paid for. And let’s have some revenue increases and find the ones that are politically most doable. There are around $1.8 trillion in tax breaks per year, we could cap them and capture a lot of money there. So I think we could put together a $2 trillion savings package without too much work. It’s not going to get us nearly as far as we need to go. But it will get us started and that’s what compromise looks like.
KS: An argument you hear from some progressives is that even the idea that we should pay for things as we go is inherently conservative and regressive — because it basically takes really big projects off the table. Republicans wanted a trillion dollars for their tax cut, but something like the Green New Deal or another revolutionary program will require way more than that and this is just a way to keep very progressive ideas from even reaching the table.
MM: I find that preposterous. The basic point of budgeting is that if something is worth doing, it’s worth paying for. And if you want European-style government, we need to have European-size taxes. Budgeting is about trade-offs. And it’s about backing up your conviction with, you know, doing what it takes to get there. Asking someone else to pay for it isn’t the way you create a sustainable budget. If you want to do something like the Green New Deal, then we need to have a VAT and a carbon tax and a financial transaction tax. You need to show what the costs are. That’s actually when you have an honest discussion of whether this is what people want. Of course we want everything if it’s free. But what’s actually free is just free for us and costly to the future. If we want to do big things, we need to have big taxes, or cut spending in other places.
KS: Conservatives say that while people believe that you can fund these things through taxes on the wealthy, that’s just not accurate — there’s not enough money there. Is that deflection or is there truth to that?
MM: There’s not enough money there to fund all the huge initiatives that we are looking at. In fact, I did a hearing two or three weeks ago with the Senate Budget Committee that lays out a bunch of the numbers. What President Biden proposed, which was a very aggressive tax increase on people making over $400,000, would be enough to stabilize our national debt where it is today, which is already too high. But it doesn’t come close to paying for the initiatives that he’s laid out. And it’s not even a drop in the bucket of paying for the initiatives that are bigger and bolder. Just as tax cuts do not pay for themselves, you can’t pay for huge, big structural initiatives on millionaires and billionaires alone.
KS: You worked on Wall Street and at think tanks before moving into your current job. Why have you devoted so much of your professional life to advocating for debt reduction?
MM: It’s hard to work an issue where you so routinely are not making progress and, in fact, are backsliding constantly. But I think that without question, [the country] would be in worse shape if we didn’t do some of the work we do. Being bipartisan is a big part of my identity. I don’t understand the world of politics. I don’t understand a world that decides that two teams beating each other up is going to lead to better outcomes than trying to find some common objectives and purposes. The bottom line for me is, despite watching the debt clock tick up and up and up, I’m the luckiest person in the world to work with an incredibly smart group of people on an issue that we all are really passionate about. I have a job that is about trying to get done something you truly believe is in the best interests of the country, even if other people disagree.
KS: What’s the bottom line? How will the size of America’s national debt affect the economy and financial markets in the coming years?
MM: I’m worried. We used to think that financial markets would indicate when it’s a problem but that’s no longer true. We now are in a situation where it’s harder to do the right things for policy in the long term because of the market gyrations they could create in the short term. This is what it’s like to live in a bubble-filled economy. We’re kind of walking around not knowing when we’re going to step on a landmine. But the more bubbles there are, the more landmines there are in our economy. And we’ve already been borrowing for too long. I know that you can’t point to it today and say, “See, we’re having a huge debt crisis.” But underneath the surface, we already are. Our economy is much less structurally sound than it would have been if our debt were at reasonable levels. It’s going to make for some very painful adjustments.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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