Last week we examined the bipartisan debt limit agreement that promised to reduce the deficit over a decade. We also observed that if the plan’s most optimistic forecasts are attained (and there are no economic recessions), the national debt will only explode by 90% instead of 96%. Small beer.
Back in 2010, a consensus appeared to be forming around action to forestall a generational debt crisis. Total debt held by the public stood at 62% of GDP, and similar blueprints from two well-respected bipartisan task forces proposed structural reforms that would hold the line on debt at around 60%. Sadly, there was insufficient political courage to act, and the debt has surged to 100% of GDP on a rocket sled toward 120% by 2033. It is also hard to argue that statesmanship is in any greater supply today, begging the question: is it too late to defuse the debt bomb?
We begin with the premise that it’s not too late, but our lethargy in dealing with the crisis ensures that the medicine will taste much more bitter, and we’ll need a bigger dose.
Those plans to stabilize the debt at 60% of GDP now seem almost quaint. That ship has sailed, and any coherent scheme must accept reality and aim for a level closer to 90% over a 10-year horizon, a tall enough order. As we have seen, only a little over a quarter of spending is discretionary and subject to annual appropriations. Major entitlements make up 62% and interest on the debt consumes 10% of total spending. Slowing the runaway debt will require substantial reforms to these entitlement programs as well as increases in revenues (tax hikes). As John Adams noted, facts are stubborn things.
Any honest deficit plan begins by setting broad spending and revenue targets and then allocating available revenue to spending priorities via the appropriations process. For example, the 2010 Simpson-Bowles commission proposed reducing spending to 21% of GDP and increasing tax revenue to 21% over 10 years. Had we adopted this approach the picture would look much different. Instead, the current CBO baseline projects spending of 24% of GDP and revenue of only 18% through 2033. The first rule of holes is to stop digging. Or at least trade in the backhoe for a spade.