Why Progressives Should Work to Control the Rising National Debt
Politicians on the lookout for ways to stir up voters recently have lit upon America’s fast-growing national debt, whether the context is health reform, unemployment benefits or the war in Afghanistan. These concerns are often merely excuses for opposing basic health insurance for working people, or help for out-of-work families, or standing up to Al Qaeda; but let’s take them at their word. What we find is that these concerns about national debt are largely misplaced — yet, not entirely so.
Ironically, progressives probably have more compelling political reasons to control this debt than would the current crop of conservative Republicans. Since the time of Ronald Reagan, Republican conservatives have understood well that the large deficits that pile up the national debt deny Democrats the resources to carry out any new initiatives. That’s precisely the dynamic that Bill Clinton and his followers understood when they pressed to balance the budget — and so, at once, create the political space to expand government’s role and deny conservatives the excuse that we can’t afford it.
Let’s go to the numbers: The total U.S. national debt today is about $12.4 trillion, and CBO expects us to add another $1 trillion a year for another decade. The combination of a high national debt that’s also growing much higher very quickly can drive up interest rates. But in strictly economic terms, these numbers aren’t as high as they may seem. The federal government itself holds $4.5 trillion of the debt, with nearly 60 percent of it sitting in the Social Security Trust Fund — and these securities can’t even be sold or traded on financial markets. That brings down the publicly-held, economically-relevant debt to $7.9 trillion. In fact, another $780 billion of that is held by the Federal Reserve, which uses its portfolio of government securities to expand or contract the money supply, and turns back to the Treasury most of the interest it earns.
So, the debt worth worrying about economically comes to about $7.1 trillion, equivalent to a little less than half of our 2009 GDP of $14.46 trillion. Looking at the national debt as a share of GDP, as economists do, makes sense, because when that share goes up, it usually means that government deficits are growing faster than the economy that finances them. Stated a little differently, when the debt’s share of GDP goes up, it usually means that the government is involved in allocating more of the economy. To many economists, this portends slower long-term growth, because government is rarely as efficient as markets in making those allocations.
That’s just what’s happening. The share of GDP represented by all of our publicly-held debt has risen from 40 percent just a few years ago to about 50 percent today, and it’s headed for 65 percent by 2015. But, the share is expected to plateau at that level from 2015 to 2020, even without new steps to reduce the deficits. The same goes for the debt as a share of the total or gross national debt: It comes in at about 80 percent of GDP today and is projected to reach 95 percent of GDP in 2015, where again it will roughly remain from 2015 to 2020. Such a fast-rising national debt, at least for the next five years, will suggest to some a less efficient economy — but maybe not, because we don’t have to assume that no other technological or organizational development emerge over the next few years that make us more efficient.
Other economists have different worries: They note that historically, when a country’s debt reaches some fairly high level of GDP, investors begin to lose confidence. And when that happens, those investors may demand much higher interest rates to keep buying the debt; or, in more extreme cases, refuse to buy any more of the country’s debt at almost any price. Across many countries and many years, this no-confidence trigger-level appears to lie at debt equal to 90 to 100 percent of a country’s GDP. But that’s certainly not a hard rule: Japan passed that level without experiencing a debt or currency crisis, and investors almost certainly would grant the United States and the dollar greater slack than Japan and its yen.
Others would have us worry about the interest costs to service the government’s debt. Because, in a roundabout way, the federal government uses bookkeeping notations to “pay†the interest it owes itself, and the Fed gives back most of the interest it earns, what’s at issue here is the interest on the remaining, publicly-held debt. In 2009, this debt came to about $7 trillion. Because interest rates have been low, the interest payments came to $187 billion last year, or less than 1.3 percent of GDP.
That wouldn’t matter much economically, but for one catch: Nearly half of it was paid out to foreign investors, especially foreign governments. If Americans owned all of our national debt, the cost of servicing it would be a wash economically, since one set of Americans (taxpayers) would pay another set of Americans (the bondholders). As it happens, foreigners now own 47 percent of all publicly held U.S. debt — including nearly $900 billion owned by the Chinese Government (that’s more than the Federal reserve holds), $770 billion held by the Japanese Government and that nation’s investors, and another $210 billion by Middle Eastern governments and their reigning families. All of those payments are deadweight losses for the U.S. economy and leave us poorer.
These foreign payments, however, also highlight the political costs. For instance, the interest paid last year to foreign governments dwarfs the annual cost of the President’s health care reforms. And over the next few years, those costs will increase very sharply, because the debt will go up quickly and interest rates will almost certainly be considerably higher. In 2015, for example, the Treasury expects to pay out more than $400 billion in net interest — at least half of it to foreign investors — and those payments should reach more than $650 billion by 2020. These increases in interest payments sent abroad would dwarf the cost of virtually any new social program that progressives might imagine.
Our large and fast-growing national debt also contains another potential trap. While a prosperous America can handle a national debt of $12 trillion or even $20 trillion a decade from now, another financial or economic meltdown on top of such debt could sink us all. America entered the 2008-2009 financial crisis and recession with an unusually small national debt as a share of GDP. That’s why the upcoming decade of trillion-dollar annual deficits (driven mainly by the costs of tens of millions of retiring boomers) will still leave us with a national debt smaller than our GDP. But imagine that a second meltdown requires new bailouts and new stimulus at least as great as the recent ones, but this time coming on top of existing, trillion dollar deficits. Global investors may well balk at those financing demands, producing a downward economic spiral for us all that would be very hard to stop.
This scenario isn’t very hard to imagine, given Washington’s inability to agree to the financial market reforms required to avert it. That leaves us with controlling the rising national debt. If the two parties don’t have the stomach to regulate Wall Street, perhaps they eventually will find their way, as Bill Clinton did, to reducing the underlying deficits.