February 01, 2000
Dollars and Sense, February 2000
Knight-Ridder/Tribune Media Services, October 4, 1999
Atlantic City Press, October 7, 1999
Los Angeles Daily News, October 8, 1999
When Ron Dellums announced his retirement from Congress last year, he gave an all-too-prescient speech. He had come to Congress twenty-seven years ago, he said, to try to do something about the national problems he cared most deeply about: poverty and health care. But these would have to wait, he was told, because we were fighting communism. “Then communism collapsed,” said Dellums, “but still they told me, ‘we can’t do anything about these issues now — first we have to balance the budget.’ Then the budget was balanced. . .”
The story never ends. Next we had to “save Social Security” — never mind that Social Security doesn’t need to be saved. The consensus forecast is that the system could be left on automatic pilot for the next 35 years, without any problems. Since projections longer than that are little more than fortune-telling, that should be the end of that story. But Social Security’s Trustees make projections for 75 years, and they find — assuming that the economy grows at less than half its historic rate — a small shortfall from year 36 to year 75. This shortfall amounts to less than one percent of our national income, which is less than the economy will grow each year for the next 75 years, even under the Trustees’ grim assumptions. In other words, some decades up the road, people whose real incomes are 30, 40, and 50 percent higher than ours may have to pay one or two percent more in taxes than we do today.
From such a molehill of a projected “problem,” politicians of both parties have created a mountain that blocks the road to any Federal spending on our most urgent national needs. But even that mountain wasn’t big enough. Now we have another — the mother of all excuses for never doing anything to help anybody — “first we have to pay down the national debt.”
Amazingly, what was once a symptom of obsessive fiscal conservatism on the right is now being championed by liberals — including some of Washington’s most liberal think tanks and members of Congress. To understand how things could have degenerated to this point, we need to take a closer look at the current budget debate.
The debate over the budget is not as complicated as it seems. What makes it so confusing is that politicians in both parties are generating a lot of fog, and most of the pundits and commentators are just shining their brights on it, making it that much harder to see what’s in front of us.
Here’s the story: over the next ten years, the Federal government is projected to take in about $3 trillion more than it expects to spend. Now this is a big number, but not as big as it seems when you compare it to our national income over this period: it comes out to about 2.7% of our income.
What to do with this windfall? The Republicans want to allocate about $800 billion (roughly a quarter of the surplus) to tax cuts, mostly to two groups of people: the rich and the filthy rich. President Clinton and most Democrats say we can’t afford it.
Both parties want to reserve $2 trillion for paying down the national debt. They say that since $2 trillion of the surplus comes from Social Security payroll taxes, it can’t be spent without endangering future Social Security benefits.
When both political parties agree on something, it’s a good time to run a fact check. As it turns out, this $2 trillion can be spent on anything we choose, or it can be used to pay down the national debt, but it won’t affect Social Security either way.
To understand this, think about what happens when you loan money to the government by buying a U.S. Treasury bond. The government then spends that money on housing subsidies for poor families. Has your money been “raided”? Hardly. You will be paid back when the bond matures, and get interest payments on the bond until that time.
The same is true for the money that Social Security loans to the Treasury — including the $2 trillion that it will loan to the Treasury over the next 10 years. And this is true regardless of whether that money is spent on health care or education, or whether it is used to pay down the national debt held by the public.
So why pay off the national debt? Some insist that it will lower interest rates and therefore stimulate growth. This argument rests on a number of dubious assumptions, but even if we accept them all, the effect turns out to be so small that it can hardly be measured. If we extrapolate from estimates made by the Congressional Budget Office, we find that paying off the whole national debt over the next 15 years would give us a Gross Domestic Product in 2015 that is one half of one percent bigger than it otherwise would have been.
Some liberals argue that paying down the debt would make it easier to finance spending on anti-poverty programs. The argument goes like this: we now spend about $218 billion (of our $1739 billion federal budget) for net interest payments on the debt. Paying off the debt would free this money up for other purposes.
But would it? In 1989 (the last business cycle peak), we were running an annual federal budget deficit of $153 billion, or 2.8 percent of GDP. For Fiscal Year 2000, we are running a surplus (by the same accounting, including Social Security revenues) of 1.5% percent of GDP. This represents a massive shift in government saving — 4.3 percent of GDP, which today would be more than $390 billion dollars. How can it be, then, that we cannot afford the extra $8 billion that it would take to make the successful Head Start preschool program available to all the eligible children who need it?
Clearly the amount of money that is available for human needs in the United States is not contrained by interest payments on the national debt. The constraints are entirely political, and shaving a few billion off of interest payments by paying down the debt is not going to make any difference. If we pay off the entire debt over the next 15 years, which seems to be the current plan, we will have freed up $218 billion a year for new spending. In 2015, that will amount to about 1.1 percent of GDP. Not trivial, but hardly worth putting off social and human progress for the next 15 years.
The national debt is a non-issue — pure distraction — and always will be, unless it were to grow at a truly unsustainable rate. At the end of World War II we faced a national debt of 109 percent of GDP, yet we stood on the threshold of the most rapid (and compared to today, equitably distributed) growth in American history. As a result of this growth, the debt declined to 26 percent of GDP in 1979. The massive military build up, tax cuts, and high interest rates of the Reagan-Bush years drove the debt back up to 50 percent of GDP by 1993; it is worth noting that even this fairly rapid accumulation of debt did not prevent the 1990s from seeing America’s longest peacetime economic expansion. Since 1993, the debt has declined to about 39 percent of GDP. So long as the debt to GDP ratio is declining (or even stable, which would allow for significant deficit spending each year), the whole issue really isn’t worth discussing.
Unfortunately there are millions of highly indebted Americans for whom the idea of paying down the national debt is very appealing. They chafe under the burden of mortgage payments, student loans, and consumer debts, and draw a direct analogy from their situation to that of the government. With both parties demagoguing the debt, lying about the finances of Social Security, and grossly exaggerating the future impact of the retiring baby boom generation — it’s no wonder the public is dazed and confused about the whole thing.
Using budget surpluses to pay down the debt makes about as much sense as a family paying off its mortgage loan, and thereby not having enough money to send the children to the dentist or doctor. This analogy is quite real, since we have about 11 million children without health insurance.
Of course the Democrats are correct to point out that the $1 trillion of surplus projected over the next 10 years that does not come from Social Security is mostly fictional: it depends on massive spending cuts on everything from meat and poultry inspection to national parks, to subsidized housing for poor families. These cuts are not going to happen, and everyone in Washington knows it. But the question of whether this part of the surplus will materialize is not all that important, unless we swallow the story that the other $2 trillion of projected surpluses must go to debt repayment.
The Democrats reason that they’re not going to get any spending on programs that would help poor or average income Americans, so long as the Republicans control Congress. So they figure it is better to pretend that we need to “save Social Security,” and pay down the debt, rather than see the surplus squandered on yet another tax cut for the rich.
This strategy worked for them last year, as pretending to save Social Security from reckless tax cuts proved to be good politics at the polls. Now they are saying that the tax cuts endanger the future of Medicare, too.
But this is short-sighted, to say the least. Polls show that most Americans are against the tax cuts, and the Republicans don’t have the votes in Congress to override a Presidential veto on the issue. At this point it looks like the Republican tax cuts are pretty much dead on arrival.
This is clearly one of those times when it is better to fight for what you want and lose, than fight for what you don’t want and win. Promoting the nonsensical notion that we must pay off the national debt before we can do anything about America’s real economic problems is a dangerous game.
The result is a political consensus that is in many ways worse than that of the Reagan years, in which the government has no role to play in solving our most pressing economic problems — poverty, education, or health insurance for the 44 million uninsured Americans. If we are ever going to see any progress on these issues, we will have to put a stop to the endless stream of excuses, and inject some truth into the debates over the budget and the national debt.