U.S. is (still) heading toward a debt crisis

This op ed appeared in the Star Tribune, February 1st, 2019

Last week, the Congressional Budget Office (CBO) released its Budget and Economic Outlook for 2019 to 2029. It got scant attention in the media, but Americans should know what it says. Although it was a slight improvement on last April’s forecast for 2018 to 2028, they should be worried.

The CBO forecasts that over the coming decade, deficits “fluctuate between 4.1 percent and 4.7 percent of gross domestic product (GDP), well above the average over the past 50 years.” These deficits will raise federal government debt. The CBO forecasts that this will rise to 93 percent of GDP by 2029, “its highest level since just after World War II.” Federal debt is forecast to be “about 150 percent of GDP in 2049 — far higher than it has ever been.”

Where is the flood of red ink coming from?

The CBO is clear that it isn’t caused by a shortage of revenue. They forecast federal revenue to rise from 16.5 percent of GDP in 2019 to 17.4 percent in 2025, and more rapidly after that, reaching 18.3 percent of GDP near the end of the decade.

Instead, the culprit is increased federal government spending. The CBO projects federal outlays to climb from 20.8 percent of GDP in 2019 to 23.0 percent in 2029. This will be driven by “the aging of the population and the rising cost of health care,” which will “contribute significantly to the growth in spending for major benefit programs, such as Social Security and Medicare.” On top of this, rising debt and higher interest rates are forecast to drive up the federal government’s net interest costs.

In this context, proposals to spend an additional $47 billion on free college tuition, $32 trillion on “Medicare for All,” and some vast but as yet unspecified sum on a “Green New Deal” are utterly delusional. The U.S. faces, at some point in the near future, a fiscal crisis.

Some deny this. Adherents of Modern Monetary Theory (MMT) argue that a government that prints its own currency can never technically go bankrupt because it can always print enough to cover any liabilities. This is true, although there is no guarantee that the money will be worth anything. MMT amounts to saying that you don’t need to worry about turning into Greece because you can turn yourself into Zimbabwe instead.

What can we do about this?

A currently popular answer is to raise taxes, particularly on “the rich.” But historical evidence suggests that doing so will have little impact on federal government revenue.

According to the Tax Policy Center, since 1946, the top rate of federal income tax has ranged from 92 percent in the early 1950s to 28 percent in the late 1980s. And yet, over the same period, federal income tax receipts were a pretty stable share of U.S. GDP; the mean average was 16.8 percent and the median 16.9 percent. Indeed, in the two years when the top tax rate was 92 percent (1952 and 1953), tax revenue as a share of GDP was, on average, 17.9 percent of GDP. In the three years when the top tax rate was 28 percent (1988-90), that figure was 17.4 percent. There is little reason to believe that a hike in tax rates will lead to a hike in tax revenue.

The problem diagnosed by the CBO is not a shortage of revenue but an excess of spending. To avoid spiraling federal debt and all the problems this will bring, substantial entitlement reforms are necessary. Indeed, it will be hard to give the Trump administration a passing grade if it takes no action on this front. Without it, the nation has little hope of avoiding a fiscal crisis.