Winston
Churchill is often quoted for his observation, “The best argument against
Democracy is a five-minute conversation with the average voter.” Or as some might say in these times, a
fifteen-second sound bite from Presidential candidates as reported in the
mainstream media.
The
campaigns so far have not generated much serious conversation about the serious
budgetary challenges facing our country.
According to a recent CBO analysis, the federal budget deficit this year
will rise to $544 billion, about 2.9 percent of GDP, up from 2.5 percent of GDP
in 2015. While federal revenues will
grow at a respectable 3.9 percent, federal spending will grow by even more –
6.3 percent. This is not a path to
fiscal soundness.
The CBO
predicts that this trend – spending growing faster than revenues – will continue
over the next decade, though at a slower rate.
By my calculations, the CBO figures reflect an annual growth rate for
revenues at about 4 percent while spending grows at just over 5 percent. This translates into an annual budget deficit
of $1.366 trillion in 2026 – with debt held by the public totaling $23.8
trillion, up more than $10 trillion from 2015 levels.
In 2015,
the federal government financed its whopping $13.1 trillion in debt held by the
public with a net annual outlay of interest totaling $223 billion. This translates to an average interest cost
of about 1.7 percent. As the CBO notes,
this interest outlay is less than what it cost to finance the national debt some
years ago, when debt was smaller but interest rates were much higher. Not surprisingly, the CBO predicts higher
interest rates in the future. By 2026,
the net interest cost is $830 billion, which averages out to 3.5 percent of the
total predicted debt of $27.7 trillion.
These are still very low average borrowing costs, looking back to recent
history. But all of this depends on many
variables -- CBO points out that a mere one percent variation in interest rates
could affect the deficit figures by over $1.6 trillion, plus or minus.
Can we
afford to continue these trends? Probably not.
If interest rates rise modestly above current levels, interest costs
will constrain the government’s ability to engage in discretionary
spending. Governments require trust in
order to sell securities to finance their deficits, and fiscal unsoundness does
not engender trust. (Of course,
monetizing debt remains an option – look at a “federal reserve note” in your
wallet – it pays no interest and has no maturity date. But this is not a good option if government
wants to maintain the dollar as the world’s reserve currency.) Gridlock in Washington seems to be keeping us
on the same path, but it is a road to perdition. The CBO results are likely on the
optimistic side, assuming no economic downturns in the coming decade.
Conventional
solutions to these problems are not easy to implement. Constraining federal
spending is a tough political bargain, as mandatory spending through
entitlement programs, including social security, healthcare, and higher
education subsidies, are popular. Some
candidates even promise to grow these benefits.
(Santa Claus, are you listening?) Raising taxes is also a tough bargain,
which entails risk of slowing economic growth.
But growth is a key. The CBO
figures assume that GDP will grow at a higher rate than average in the early
part of the next decade, but then at an average rate of 2 percent, adjusted for
inflation. Herein lies the problem – and
a potential way out.
We
should be focusing more carefully on growth.
Cooter and Schaeffer in their book, Solomon’s
Knot, focus on the power of growth in bringing positive changes to
society. The math is simple: over the course of a century, a 2 percent
growth rate increases wealth by about seven times. In contrast, a 10 percent growth rate
increases wealth by about 14,000 times (13,780.61 times, to be precise). If you care about redistributing wealth,
isn’t it better to have more to redistribute?
And if you want the government to engage in spending to help people,
isn’t it better to have more national income?
So argue Cooter and Schaeffer. Query how the debate would change if we begin evaluating
policy prescriptions through a lens that focuses on the impact on growth. (And in case you wonder, protectionism is not
a pro-growth policy. See my colleague
Ernie Goss’ previous post.)
[Note: This blog was previously published at the blog site of the Institute for Economic Inquiry, where I also write. Feel free to check in there for other blog posts: http://blogs.creighton.edu/iei/]
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