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By Paul Krugman
In March 2011 Erskine Bowles and Alan Simpson, chairs of a White House deficit-reduction commission, issued a frightening warning about U.S. government debt. Unless America took major steps to rein in future deficits, they warned, a fiscal crisis could be expected within around two years.
Bowles described what he thought would happen: Foreigners would stop buying our debt. And then, he asked: “What happens to interest rates? What happens to the U.S. economy? The markets will absolutely devastate us.”
That was 12 years ago. At the time Bowles issued his warning, the interest rate on 10-year U.S. bonds was about 3.5 percent. Not much was done to reduce deficits, aside from a squeeze on discretionary federal spending that probably delayed economic recovery. But at the end of last week the 10-year rate, which has gone up substantially over the past year as the Fed raises rates to fight inflation, was … about 3.5 percent.
The point is that in the early 2010s, the last time we faced a potential crisis over the debt ceiling, there was an elite consensus that budget deficits were a severe, even existential threat. This consensus was, in retrospect, completely wrong. Yet it almost completely dominated the political conversation, to such an extent that, as Ezra Klein pointed out, the media abandoned the normal rules of reportorial neutrality and openly cheered proposals to cut Social Security and Medicare.
And those of us who challenged the elite consensus, mocking the peddlers of debt panic as Very Serious People (because ranting about the evils of debt sounds serious and responsible, even when the math doesn’t support the rhetoric), were treated as odd and out of touch.
Now the Very Serious People are trying to make a comeback, in effect lending cover to Republican efforts to hold America hostage by refusing to raise the debt ceiling. So it’s important to realize that the case for debt panic is, if anything, even weaker than it was in 2011.
It’s true that U.S. debt is very large — $31 trillion (said in your best Dr. Evil voice). But America is a big country, so almost every economic number is very large. A better way to think about debt is to ask whether interest payments are a major burden on the budget. In 2011 these payments were 1.47 percent of gross domestic product — half what they had been in the mid-1990s. In 2021 they were 1.51 percent. This number will rise as existing debt is rolled over at higher interest rates, but real net interest — interest payments adjusted for inflation — is likely to remain below 1 percent of G.D.P for the next decade.
This doesn’t sound like a crisis. But what about demography? America is aging, which means a rising burden on Social Security and Medicare. Doesn’t this mean big trouble ahead?
Well, aging is a real issue. But much of the fiscal impact has already happened. Approximately two-thirds of the baby boomers, born between 1946 and 1964, have already reached the age of Medicare eligibility. Further aging will place additional demands on the budget, but we’re talking about only a few percentage points of G.D.P.
So why do we often hear about extremely grim long-run fiscal projections? As it turns out, these projections are only partly driven by demography; they largely reflect assumptions about rising health care costs and interest rates that have in the past proved much too pessimistic.
The Congressional Budget Office regularly issues long-term budget projections, which are often cited in fiscal debates. My guess, however, is that very few people are aware of how much less dire these projections have become since the heyday of the Very Serious People.
In 2011 the budget office projected that under what it considered the most realistic scenario, federal interest costs in 2021 would be 4.4 percent of G.D.P. — more than twice their actual level. It also projected that by 2035 federal debt would reach 187 percent of G.D.P. Its most recent projection puts that number at 117 percent.
Now, fiscal surprises aren’t always positive — who predicted the huge expenses associated with Covid-19? — and I’m not arguing that government debt can never be a problem, or that our long-run fiscal position is perfectly OK. But if you’re seriously concerned about America’s long-term future (as opposed to being Very Serious), you should be thinking about multiple issues, from climate change, to infrastructure, to child poverty (which is a long-run issue because children raised in deprivation grow up to become less healthy and productive adults). In terms of priorities, federal debt should be well down the list.
Nonetheless, the debt scolds are trying to make a comeback. Partly that’s because, as I said, ranting about federal debt sounds serious and hardheaded. Partly it’s because deficit rants are all too often deployed in the service of an ideological agenda, a push to cut Social Security, Medicare and Medicaid (but not, of course, giving the Internal Revenue Service the resources to crack down on tax evasion).
So here’s my proposal: Let’s not do 2011 all over again. Let’s not panic over an overhyped issue. Let’s not assume that deficit peacocks are doing anything more than posturing. And let’s not allow the media to become, once again, a de facto accessory to an ideological, partisan agenda.
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