Monday, April 13, 2020

The debt reckoning has finally arrived

Robert Samuelson, the Washington Post 

We finally have a plausible answer to a question that has haunted U.S. government for more than half a century: Why should we bother balancing the budget?

The answer, as practiced by political leaders of both parties, has been: We shouldn’t. It’s too hard. Spending has to be cut or taxes have to be raised. These steps are unpopular. Meanwhile, the benefits of balancing the budget seemed negligible or nonexistent. Why bother?

This was, we should know now, the wrong answer. The right answer — meaning what we should have been doing since the 1960s — is balancing the budget in good times and tolerating budget deficits when the economy faces a recession, a major war or some unforeseen ­catastrophe.

Instead, we found excuses to justify expedient policies: spending more and taxing less. What we conveniently overlooked was the need to preserve our borrowing power for an unknown crisis that requires a huge infusion of federal cash. Because the amounts are so large and the need so pressing, massive borrowing cannot be avoided.

The reckoning has finally, though inevitably, arrived. Since 1960, the federal budget has been in the black only five years (1969 and 1998-2001), and each of these tiny surpluses arrived courtesy of a fleeting economic boom. The coronavirus pandemic is moving the debt into unknown territory, greater than the borrowing undertaken to fight World War II. In 1946, the federal debt held by the public was 106 percent of gross domestic ­product.

Already, existing deficits would bring that total to nearly 100 percent of GDP by 2030, the Congressional Budget Office estimates, if all costs are covered by borrowing. In 2019, the existing federal debt held by the public was $16.8 trillion. Let’s assume that the total cost of the rescue will be $4 trillion, about half of which has already been approved by Congress. This would add about 18 percent of GDP to the existing federal debt.

Most economists seem to assume that these immense amounts can be easily borrowed. Debt denominated in other currencies (the euro, the yen) is unattractive. And low dollar interest rates will keep down the costs of servicing the debt, say economists.

“Until now, the debt has involved few adverse side effects. Interest rates seemed largely unaffected. Deficits don’t seem to have “crowded out” private investment. There haven’t been crippling runs on the dollar on foreign exchange markets. Just the opposite: The dollar has been “strong,” reflecting its role as the premier global currency, used to conduct trade, make cross-border investments and provide a “safe” asset against political and economic turmoil.

But there was no guarantee that this good fortune would continue indefinitely. It’s the “something for nothing” premise that makes deficits so politically appealing. The most obvious beneficiaries are, of course, politicians. Democrats could promote more social spending. Republicans could pledge more tax cuts. Aside from empty rhetoric about curtailing deficits, hardly anyone felt a need to balance the books.

But blaming politicians is a superficial conclusion. The real agents of budget deficits were academic economists, who destroyed a preexisting political consensus to balance the budget as a matter of sound policy and prudence, as Bill White argues in his highly informative 2014 book, “America’s Fiscal Constitution: Its Triumph and Collapse.”

The old norm was this: If more government was worth having, it was worth paying for with taxes. To this sensible standard, economists — in an act of intellectual and political arrogance — took a sledgehammer. First and foremost came the Democratic Keynesians, disciples of economist John Maynard Keynes. They convinced President John F. Kennedy that the federal budget could be used to stimulate faster economic growth and lower unemployment.

Next came the Republican “supply-siders” and their tax cuts. Inexorably, the old political norm (what should government do and how should it be paid for?) was casually discarded. In its place was a new norm: that federal budgets should be viewed as instruments of economic policy.

Under the old norm, White argues, government borrowing was mostly limited to a few national needs: acquiring land (the Louisiana Purchase), conducting war and cushioning business slumps. But government also had to control spending. Except for the Great Depression, this consensus generally served the country reasonably well.

Once the old norm had been shattered, it couldn’t easily be reestablished because it was no match for the new norm’s political appeal. The growing debt makes it harder to pay for other vital programs, from the Centers for Disease Control and Prevention to the FBI to defense. The promise of an improved economy rationalized deficits, though these promises rarely materialized.

The coronavirus pandemic, while unavoidable, has been made worse by our past expedience. The future almost certainly holds similar surprises: a nuclear exchange, a biomedical attack, another financial crisis or something no one has yet imagined. A prudent nation would be saving against this prospect. We aren’t.

1 comment:

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