As debt jumped over the past decade, economists warned that retiring baby boomers might soon overwhelm retirement programs, swamp the federal budget and keep the debt unusually high as far as the eye can see. That day has come and the answer now apparently is to “get used to it.”
After years of debt that normally amounted to about a third of the nation’s total economy, it has spiked to more than 70 percent with no relief in sight.
The nonpartisan Congressional Budget Office bases its estimate on current law, and it sees the debt levels approaching 80 percent in 2025.
President Barack Obama’s proposed fiscal 2016 budget envisions the nation’s debt at 74 percent of the size of the U.S. economy in 10 years. But that’s if he gets all the changes he wants, including large tax increases. That’s highly unlikely.
Just eight years ago, this number was about 35 percent, about the historical average. The latest forecasts suggest that official Washington now expects debt held by the public to remain at levels twice the historical average for the foreseeable future.
White House Budget Director Shaun Donovan voiced in early February what other politicians might well have just thought privately. He likened the wave of retiring baby boomers – Americans born between 1946 and 1964 – to the proverbial “pig in a python” that bulges inside the reptile as it is swallowed, digested and passed through.
“This demographic shift through the middle 2030s is a huge fiscal challenge to get through, and so what is sort of acceptable in the next 20 years is different from what might be acceptable long term,” Donovan said.
Got that?
It means they think high debt now is OK. The federal government will continue running deficits to pay for Medicare, Social Security and other programs that will be strained even more by the boomers’ retirement.
The most immediate consequence is paying more interest, a lot more.
In 10 years, the United States will pay about $827 billion in interest on the swelling debt. That’s almost four times what the government pays now in interest. And by 2025, it will eclipse the $711 billion in projected spending for defense, as well as the $689 billion projected for all non-defense spending outside of the entitlements such as Social Security.
Under President George W. Bush, the debt rose from $3.4 trillion in 2000 to $5.8 trillion in 2008, fighting two wars without raising taxes to pay for either and actually lowering taxes. Bush began emergency spending to deal with the Great Recession, and that continued under Obama. Debt went from $7.5 trillion in 2009 to $12.6 trillion in 2014.
And all this spending happened right before the first boomers began hitting official retirement age in 2008.
“We were entering into a fiscally challenging time, and the Great Recession added to it and made it more difficult,” said Robert Bixby, head of the budget watchdog group Concord Coalition. “If you go back to 2007, nobody would have been talking about (debt equal to) 74 percent of GDP as the new norm.”
Nobel Prize-winning economist Paul Krugman is among the few unconcerned. In a Feb. 2 New York Times column, he said the economy was too weak to fix long-term imbalances and applauded Obama’s proposals to boost spending.
“In today’s economic and political environment, long-termism is a cop-out, a dodge, a way to avoid sticking your neck out,” Krugman charged. “And it’s refreshing to see signs that Mr. Obama is willing to break with the long-termers and focus on the here and now.”
That irked Alice Rivlin, a former vice chair of the Federal Reserve and the first director of the Congressional Budget Office, in 1975. She noted recently that the debt as a share of the economy has tripled since 1975, when it was 24 percent.
“I don’t care what Paul Krugman says, that disturbs me,” Rivlin said.
Aside from crowding out government and defense spending, high debt leaves the nation vulnerable if there’s a future natural disaster, terror attack or financial crisis. There’s less room to issue more government bonds without buyers demanding a higher rate of return to offset default risk. That in turn would make it even more costly to borrow to pay off past bills.
“You have another big shock, and it just ratchets up again,” said Bixby of Concord Coalition. “The trend line is for it to go up on autopilot because of the structural deficit we have in our fiscal policy.”
As a liberal think tank economist, Jason Furman criticized the mounting debt and deficits of the Bush administration. Now Obama’s head of the White House Council of Economic Advisers, he argues against focusing on the debt number.
“What we had set from the very beginning of this administration as our fiscal goal was getting the deficit under 3 percent of GDP. That wasn’t picked as some arbitrary number,” said Furman. “That was picked because that’s where you need to be in order to have your debt falling as a share of the economy. We look more at the trajectory and ask ourselves is it sustainable for the economy.”
The difference between what the government spends and what it takes in – the deficit – fell by about 70 percent in Obama’s first six years, and was equal to 2.8 percent of the size of the overall economy in the fiscal year that ended Sept. 30. The CBO sees it returning to 3 percent in 2019 and 4 percent in 2025, the White House 2.5 percent in 2025.
“The number that I would focus on is where we are relative to the historical average on the deficit,” insisted Furman, noting it’s now the 40-year average.
Either way, this will be a challenge in the 2016 elections, especially anyone repeating the White House “pig in a python” to explain away the elevated debt.
Said Bixby: “I think that would be a tough message on the campaign trail – ‘We have higher debt, live with it.’”
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