The Editors Are Worried About the Debt (Updated)

The editors of the Washington Post are worried about the public debt:

The nation has reached a hazardous moment where what it owes, as a percentage of the total size of the economy, is the highest since World War II. If nothing changes, the United States will soon be in an uncharted scenario that weakens its national security, imperils its ability to invest in the future, unfairly burdens generations to come, and will require cuts to critical programs such as Social Security and Medicare. It is not a future anyone wants.

Stabilizing the debt should be a top priority for Mr. Biden and Congress. That starts with setting a clear goal. A reasonable target would be aiming not to have the debt exceed the size of the economy (a 100 percent debt-to-gross-domestic-product ratio). Currently, the debt is 98 percent the size of the economy and on track to hit 118 percent in a decade, largely because of soaring costs from baby boomers retiring and heftier interest payments, according to the nonpartisan Congressional Budget Office. It doesn’t take a PhD in accounting to see the warning sign here: As debt gets bigger than the economy, the interest costs become so onerous that there is little money left for anything else. By 2033, the nation will be spending more on paying creditors than on the entire defense budget.

Their explanation for why the debt has grown so high so fast is to blame it on the Baby Boomers. That those born between 1946 and 1963 would eventually become old has been known for, yes, more than 70 years.

I think a better direction in which to point a finger is at bad assumptions. For quite a while it was assumed that real median wages would always grow. That hasn’t been the case or has only intermittently been the case for 40 years. For decades it has been assumed that spending more invariably produced more economic growth. There is substantial empirical evidence that the larger the overhang of the public debt, the slow is economic growth. It has been assumed that a college education would provide a comfortable living. What is true is that a medical degree, a law degree from a top law school, or engineering degrees in certain specialties do that. Unfortunately, the number of those school slots doesn’t increase as fast as the population does. There are blue collar positions that provide a comfortable living, too, but those have been de-emphasized in favor of college educations. Now we’re boosting the public debt to reduce the private debt incurred by young people in educational debt and will never be able to pay it back. More bad assumptions.

Something else should be considered. Throughout American history it has proven very difficult to raise the effective tax rate much above where it is right now. There is a name for that and I’ve posted on it but it doesn’t come to mind right now. If you don’t want to borrow more (“print money”) and you can’t increase the effective tax rate and you don’t want to reduce benefits paid, you’ve got to look for other areas of the budget to cut. There aren’t many left.

Update

The editors of the Wall Street Journal are unimpressed by President Biden’s plans as well:

The press is reporting that President Biden’s 2024 budget proposal released Thursday would cut the deficit by $3 trillion over 10 years. Way to bury the lead. The plan raises taxes by nearly $4.7 trillion and would increase revenue and spending to unprecedented plateaus as a share of the economy.

The President’s $6.89 trillion proposal is a political document that sets up his re-election campaign. Its spending and tax proposals were rejected in the last Congress under Democratic majorities and have no chance of passing with a GOP House. But the budget shows where Mr. Biden wants to take the country if he wins a second term. Bernie Sanders would be pleased.

concluding:

Even with all the taxes, deficits over the next decade would total $17 trillion, and debt held by the public as a share of GDP would rise to 109.8% in 2033 from 97% last year. Mr. Biden’s budget is a recipe for an economically and militarily (see nearby) weaker America, but at least he’s warning voters of his intentions—unlike in 2020.

With the exception of the corporate income tax, I thought that President Trump’s tax cuts were foolish and whatever growth they produced would not be enough to generate enough taxes to make up for the revenue lost. That has proven correct. I think that when you have an economy that’s growing robustly, you can afford to spend some of the income you’re receiving on things you’d like as well as on what you must. As the economy slows, you don’t.

At this point I think we need to stabilize Medicare and Social Security and start getting more bang for our terabucks in other areas of government. Anything that doesn’t do either of those are wastes of breath.