R. D. Norton
GREAT BARRINGTON, Mass. – Congress has once again voted to increase the national debt, less than two months after its last vote to increase the debt.
The gnashing of teeth over the new high water mark – $14.3 trillion – was largely a charade. There are only two ways to stop these increases: by cutting spending and-or increasing revenues.
The statutory debt limit is supposed to keep a lid on how much the federal government can borrow. But it has failed to do that. Since 1940, Congress has voted some 90 times to increase the limit, extend the duration of a temporary increase, or change the definition of debt subject to the limit. Since 2002 alone, it has raised the limit ten times, more than doubling the Treasury’s borrowing authority. The latest increase: $1.9 trillion.
Every time Congress sets a new limit the government quickly reaches it, and Congress responds by raising the limit again.
So the question is not whether Congress should limit the debt ceiling, but who will finance the annual deficits (the “shortfall” between spending and tax revenue) that are forcing these increases.
The national debt is the sum of all the budget deficits (minus a few budget surpluses) the federal government has run over the course of American history. To make up for these shortfalls government must borrow in the capital markets by issuing new Treasury securities.
Even before the recession the government had been spending about $3 trillion a year, while collecting about $2.5 trillion in taxes. As a consequence, the national debt nearly doubled, to about $10.7 trillion, during the Bush years.
Many economists viewed such deficits as “manageable,” as long as they could be kept within 3 percent of annual output, or gross domestic product (GDP). The recent recession and the bailouts of banks and Detroit pushed the deficits to more than 10 percent of GDP: a nearly $1.6 trillion deficit expected in the current fiscal year, with another $1.3 trillion predicted in fiscal 2011.
According to Obama administration officials, anticipated budget deficits over the next seven years could double the national debt still again.
For the moment, there’s an artificial and even surreal calm about a deficit equal to 10 percent of GDP, growing at $1 trillion or more a year. Defenders of the status quo believe that with unemployment at 9.7 percent – and the economy still shedding jobs – this is no time to raise taxes or cut government spending. We can do that later, they say, when the economy improves.
But the surge in debt financing will make it more difficult for the economy to improve, as more tax dollars go to finance interest payments, leaving fewer dollars for other needs.
A second storm cloud is the aging of the baby-boom generation: Americans born between 1946 and 1964. Demographic pressures on the budget have begun to grow. The first baby boomers already have started collecting Social Security and will become eligible for Medicare next year. Social Security and Medicare already account for about a third of all federal expenditures and their share is growing. If the government borrows money to pay these long-promised benefits, as seems likely, federal debt could skyrocket.
A third challenge is the growing reluctance of foreigners—notably China—to finance the deficits by acquiring ever-more Treasury securities.
The solution to such tensions is painfully obvious: control spending and stop running massive deficits.
But as we saw a few days ago, as Congress voted to raise the debt limit once again, that obvious solution is politically beyond Washington’s grasp.
R.D. Norton is a senior fellow at the American Institute for Economic Research (www.aier.org), 250 Division Street, Great Barrington, MA 01230.
