There are few better barometers (other than Larry Summers) of the conventional wisdom among establishment Democrats than Steve Rattner who, in his New York Times op-ed, warns about debt:
Medicare for All. The Green New Deal. Free college tuition.
With each new entrant into the Democratic presidential sweepstakes comes a fresh cascade of ambitious social programs to entice and excite would-be supporters.
The list of “payfors,†to use a bit of Washington jargon, grows more slowly. They’ll pay for this how, again? Tax the rich, tax the rich — or take cover behind a convenient bit of progressive dogma: Don’t worry about the fiscal impact because America’s rising budget deficits and debt levels don’t much matter.
That’s a scary drift of thought, and it should set off alarm bells for all Americans. Vast increases in debt will ultimately compromise Washington’s ability to maintain its current array of spending programs, let alone add new ones, and threaten our standard of living.
It would be nice if he were as concerned about debt during Democratic administrations as he is during Republican ones but, alas, that seems to be too much to ask for.
There’s more than one way of looking at debt. One way is that more debt today means less spending tomorrow and that’s the thinking he reflects in his piece.
Another way is that government spending doesn’t matter. We can just issue ourselves credit without let or hindrance.
My own view is that we should not issue ourselves credit to pay operating expenses, only for things that will pay real dividends. Some things pay dividends far beyond what is spent, e.g. the space program, some things have diminishing returns to scale, e.g. health care spending, other things actually have declining returns to scale, e.g. war. All spending, public or private, affects incentives. Bad incentives are like gunk in the engine. They reduce the power of the whole machine.
We should choose wisely.
However, pay attention to what Mr. Rattner has to say. He’s telling us what the present Democratic leadership thinks.
Question comment: Why is there so little consensus on national debt?
I’m certainly not an economist, but if we have to borrow to service the debt, can any economist defend that? That seems to be the trajectory.
Many reasons. Borrowing is easier politically than taxing. Complaining about borrowing is a lazy way of attacking your opponent’s spending priorities while defending your own. Most politicians don’t understand banking.
Gray
A couple comments. I’m much more cynical than Dave. Most politicians understand full well what they are doing (I’m not talking AOC and her ilk. I say this in all sincerity, she’s a childlike moron who knows nothing) but they just think they will have time to get theirs and move on before the shit hits the fan. So far they have been correct. This makes them immoral opportunists.
As for debt service. Many corporations and governments simply roll over (refinance) their debt as it comes due. The issue comes when increasing interest only service starts exceeding increases in cash flow or investors willingness to refi. In the corporate world any credit officer worth his/her salt will say “the deal has to get better.†What does that mean? The deal must delever over time. Event risk (shit happens) and the increasing inability to forecast the farther you look into the future means you need your leverage risk to decline over time. Governments play by different rules, but are not free of them. The baby boom is the current government version of event risk, and we have planned for it not at all.
No wonder MMT is starting to look sane to more and more people. Truth is,deficit spending can be good, even necessary, but should hardly be routine, which it is now.
” health care spending”
I would wager that few things have a better return than public health, especially vaccines. Look at what probably amounted to thousands of lives saved due to the outstanding response to the Ebola scare.
Steve
Very little of total health care spending can reasonably be thought of as “public health”. What percentage of health care spending does vaccination comprise? By my reckoning about $10 billion is spent annually on vaccinations in all forms in the U. S. Total health care spending is, what, $3.5 trillion? That would make it .25% of total spending.
I’m not criticizing vaccinations. I think it would be difficult to construe heroic measures to save the life of a 90 year old as a good investment.
Government spending is no more or less “issuing one’s self credit” than private spending. If a single-payer system is undesirable for this reason, or because health spending suffers diminishing returns, it must also be accepted that there’s no point in providing health care at all.
So we’re back to the primitive 1990’s rhetoric of “public bad/markets good”.
I guess “diminishing returns” is unclear. It means that the benefit of something does not increase linearly with spending. It does not mean that spending is without utility.
Here’s a concrete example. Public water purification systems provided major health benefits. Prior to water purification cholera outbreaks caused thousands or hundreds of thousands of deaths in American cities. Having bottled water delivered would probably not have a commensurate effect. There’s a diminishing return.
No politician of any party cares about the public debt. It is a non-issue to all of them. Debt would not be a problem if tax revenues and GDP kept pace, but they do not. In a few years, the annual interest payment on the accumulated debt will be the largest item in the federal budget, or would be if we had budgets.
The ever increasing interest payments, which are what is important here, are not only preventing new programs, they are squeezing out all sorts of spending for established programs, like highways, schools, research. The radicalized Democrat majority in the House is going to try to increase domestic spending in all sorts of areas and to reduce defense spending. Given the realities of Washington’s power politics, they may partially succeed. The temptation for everyone will be to fund everything, existing and new programs, and to do it with borrowing.
Blogs like al fin are continually posting essays claiming that China’s debt means it is on the verge of economic collapse. But China’s economy, equal in size to ours (PPP), is still growing at two to three times ours is, despite the recent declines.
A US default is a real possibility. It would drive the world into a new Great Depression with unknown consequences for all. Last time we got WW II. A nuclear WW III seems inevitable.