I just heard Clinton Secretary of Labor Robert Reich make a good point on ABC’s This Week. He pointed out that there’s a distinction between short-term spending (like the ARRA) and long-term structural spending like Social Security and Medicare. That’s absolutely correct. There is.
There are several budgetary milestones that confront us. The first is when Social Security and Medicare start paying out more money than they take in in the form of taxes. That’s already the case with Medicare and when the trustees’ report comes out later this month I expect it will tell us that Social Security will see that happen this year, several years earlier than expected. That constitutes a major milestone because it means that, not only will Social Security and Medicare cease being cash cows, we’ll actually need to borrow to sustain them.
The second milestone is when the trust funds for Medicare and Social Security are exhausted. Although I suppose it could be claimed that this milestone will be largely symbolic since by law the Social Security and Medicare trust funds are held in the form of federal debt, i.e. money we owe ourselves, I think it, too, will be important. The pretext that Medicare and Social Security are insurance rather than handouts will be increasingly harder to defend.
The third milestone relates directly to Dr. Reich’s point. Borrowing huge gobs of money and using it for fiscal stimulus adds directly to the debt. Even if you accept the Keynesian strategy in the belief that the multiplier is greater than one, you believe that. Fiscal stimulus via spending increases requires adding substantially to the debt. That’s what it means.
The third milestone is when the interest on the debt rises to the level of the deficit. At that point it means we will be borrowing to make interest payments. No good can come from that.
Interest rates are currently at historic lows. They can decline no further and, indeed, it is inevitable that they will rise. As the amounts we need to borrow increase and interest rates rise, payment on the debt is going to grow very, very rapidly. IMO that’s where we’re likely to see the crisis.
