The Tao of George Best.

The great—and highly-paid–soccer-player George Best explained his post-career bankruptcy: “I spent a lot of money on booze, birds and fast cars. The rest I just squandered.” 

The final years to the 1990s were good years for American public finance: four consecutive annual budget surpluses and a total debt of about $5.7 trillion.  Over the course of the next two decades, the debt rose above the $25 trillion mark.  The Congressional Budget Office (CBO) projects that the debt will rise by more than $20 trillion in the next decade.  The longer-run projections show things getting much worse.[1] 

One of the drivers in debt expansion in the first decades of this century came in low interest rates.  Keeping rates low formed a response to repeated major economic problems.  It also meant that the interest that the government has to pay to much of the debt is cheap.  That policy came to an end when the Federal Reserve Bank began raising interest rates to fight inflation.  The smart money once expected low interest rates to go on forever; now the smart money seems to think that high interest rates are here to stay for the foreseeable future. 

More troubling is the change in the ability of the United States to pay the debt, which consists of both principal and interest).  During the expansion so far, from c. 2000 to c. 2020, the ratio of debt to Gross Domestic Product (GDP) tripled to 98 percent.  Over the next decade that ratio is projected to rise to 118 percent.  That is, the debt will expand at a faster rate than will the economy.  “The longer-term projections show a near-complete loss of control over fiscal policy [i.e. taxing and spending choices].” 

Americans and foreigners will go on buying American government debt (Treasury bonds, IOUs) so long as they think that they will get paid back.  If people start to think that they will not get paid back, then they will become reluctant to buy debt.  The price offered by the government will have to rise.  Other forms of spending will have to be sacrificed to stave off even the shadow of bankruptcy. 

The obvious solution is to stop the problem from getting worse immediately while we figure out a long-run solution.  That would suggest both tax increases and spending cuts. 

The Republican Party has made a fetish out of tax cuts.  It turns out that Democrats aren’t willing to roll-back most of those tax cuts when they get in office.  Democrats have built their “brand” on new and expanded-old government programs to address social problems.  In many cases, the benefits promised by the exponents of both sides have failed to materialize.  Reversing course is going to be painful—if it happens.  Democracy has been pretty good at distributing benefits.  It has seldom been good at distributing sacrifice.[2]  The Constitution may not be a “suicide pact,” but our current politics may well be such a pact. 

Obviously, the debt resembles climate change.  They are “primary” problems without painless solutions.  Transgender athletes, Donald Trump, and even guns are “secondary” issues. 

The questions are:

  1. Can we focus on the essentials? 
  2. Can we solve these problems without breaking democracy itself? 

[1] William Galston, “Ballooning National Debt Is a Rotten Legacy,” WSJ, 12 April 2023.  On Galston, see: William Galston – Wikipedia  It’s not like he is some kind of no-account. 

[2] The experiences of Britain and the United States during the Second World War are notable exceptions. 

Long Term Trends 3.

In 2010 and 2011, New York Times correspondent David Leonhardt turned to the problem of the long-term deficit.[1] In his analysis, that deficit arises from “the world’s highest health costs (by far), the world’s largest military (by far), a Social Security program built when most people died by 70—and to pay for it all, the lowest tax rates in decades.” By Leonhardt’s estimate, we will need about $500 billion a year in annual deficit reduction for the next decade. The money will have to come out of the three big spending categories and from more revenue.

The Medicare budget is the “linchpin of deficit reduction.”  Leonhardt recommended introducing incentives for people to choose cost-effective health-care. In practice, that will mean taxing employer-provided health-care benefits like the income they really are. The cost has risen massively since 1975. This encourages spending on health-care, rather than using the market to restrain price increases. Also, it is a benefit available only to people with employer-provided health-care. So, Americans get taxed differently for no good reason. This cost the government $264 billion in revenue in 2010. The federal tax subsidy created by sheltering them from taxes benefits drug makers, hospitals, and insurers.[2] He also wanted Medicare to refuse to pay for health care that cannot demonstrate that it makes people healthier.

Test social programs for actual effectiveness. Lots of them just exist, rather than achieving anything. Doubtless, many Republicans would say the same thing about the encrustations of regulations on business and industry that have grown up over the decades without ever being sunsetted.

Last, cut military spending by $100 billion a year to reverse the post-9/11 expansion.

Some leading conservatives—Mitch Daniels, Glen Hubbard, Gregory Mankiw–have endorsed means-testing Social Security and Medicare benefits. That is, shove more of the cost of their own care and retirement off on people who can afford to pay it.

Leonhardt also favored higher taxes on the middle and upper classes. The mortgage-interest deduction chiefly benefits people in the higher income brackets. Tax breaks for investors (IRA exclusion, $12.6 billion; lower tax rate for dividends, $31.1 billion; lower tax rate for capital gains, $36.3 billion; not taxing capital gains on items left to people in wills, $39.5 billion; and the 401(k) exclusion, $52.2 billion) total $171.70 billion in ‘lost” revenue.

Social Security and Medicare are essentially about paying for the past. (Often an improvident past.) Spending on education, research, and infrastructure are about paying for the future we desire. Leonhardt argues that we should actually be spending more on the future.

However, it isn’t clear that American democracy has the ability to confront powerful and well-entrenched interest groups. Reforming Medicare would involve taking money away from doctors, insurance companies, hospitals, pharmaceutical companies.  Stabilizing Social Security will involve raising the cap on withholding, so that upper income groups get gored and means-testing benefits at the cost of upper-income groups. Raising the taxes on the upper income groups to sustain benefits for lower income groups invited push-back in the past and will do so again. Cutting defense spending has never been as easy as increasing it, especially in the midst of dangers. The refusal of Democrats to define “fair share” makes rational discussion difficult.

Still, laying out the problems and some possible solutions makes it possible to think about the implications.

[1] David Leonhardt, “The Deficit: Real vs. Imagined,” NYT, 22 June 2011.

[2] David Leonhardt, “Health care’s obstacle: no will to cut,” by NYT, 10 March 2010; David Leonhardt, “The 3 Biggest Tax Breaks—and What They Cost Us,” NYT Magazine, 17 April 2011.