Three reasons to relax -- a bit -- about the deficit
The deficit is a problem, particularly in the long term. But to listen to Alan Simpson and Erskine Bowles, you'd think it was going to eat your children. Tomorrow. Without cleaning up the mess.
There's some deficit fear-mongering going around town. Some of it is a function of partisanship: The deficit makes Obama and the Democrats look bad, and that's led a lot of people who want Obama and the Democrats to look bad to get much more excited about debt than they were in, say, the Bush years. If you want to know how seriously to take this, note that the same folks warning that the U.S. is following Greece's path to "to fiscal disaster" are trying to add $4 trillion to the deficit by extending all of the Bush tax cuts indefinitely.
But some of it is a function of legitimate concern. Simpson and Bowles are certainly in this because they're really worried about the debt. The problem is, being concerned about something means you have to get other people concerned, too. And that sometimes requires some overstatement, or at least emphasizing all the reasons for worry. But there are reasons to take heart, too. Here are three of them worth keeping in mind as this conversation moves forward:
1. The market isn't worried -- at least not yet. We worry about the deficit because high deficits create a specific problem for the American economy: high interest rates on government debt, which show that the market is worried about our ability to pay the debt back but also make it hard for both the government and the private sector to borrow. But we're not seeing high interest rates. The government can sell a 10-year bond with a 2.54 percent interest rate right now. When George W. Bush entered office, that was 5.16 percent. When Bill Clinton took charge, it was 6.6 percent. When George H.W. Bush said the oath, it was 9.09 percent.
2. We're the only game in town. The markets can turn on us, of course. After all, they've turned on us before (as you can see from the 1991 interest rate), and they're turning on Greece and Ireland now. But where are they going to go? They need to find government debt that's safer than ours. The natural choice would've been Europe, but the continent is a fiscal basket case. Japan's economy is worse than ours. And China? Riskless? You have to be kidding me. The global economy just doesn't offer conditions conducive for the market to run somewhere else.
3. Debt hasn't gone up by as much as you think. We tend to think of debt in terms of government borrowing. But not all of the country's debt comes from the government. It also comes from businesses and households. And that debt -- private debt -- has plummeted in recent years as companies and households sit on their cash rather than leverage themselves. So though it's true that public debt has risen sharply, private debt has dropped precipitously. The total amount of American debt that the global capital markets are being asked to absorb, in other words, has not changed by nearly as much as people think. A lot of what's happened is we've replaced private debt with public debt. This wouldn't matter if the government were continuing to borrow at the same rates even as the economy recovered, but it isn't.
What you'll notice with this list is that it's about the deficit in the short to medium term. For now, interest rates are low. For now, there's nowhere else for the money to go. For now, the rise in public debt has been paired with a drop in private debt. We have serious long-term problems that aren't amenable to these excuses. But that's the old story about how we need to get our health-care spending under control, and it's a story that we can resolve over a period of years or even decades -- which is exactly what all the deficit plans do in their health-care sections.
All of which is arguably reason for optimism. I don't think the chances for a big deal in the next year or two look very good. Nothing Congress does to reduce the deficit will match the damage it's going to do by extending the Bush tax cuts. But we might well see a large number of smaller deals reached in coming years -- much as we saw during the '90s (we had deficit-reduction bills in 1990, 1993, 1995 and 1997). And though you wouldn't know it from the rhetoric, that might be enough. Maybe.
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