This article originally appeared in The Hill on April 13, 2018.
Will Investors Stay Calm As America Once Again Faces $1 Trillion Deficits?
At the turn of every year, Washington gets a cold-water shock when the Congressional Budget Office reports on the state of the nation’s finances. Year after year, for almost the last two decades, the numbers have brought another measure of bad news. First, in the early 2000s, the budget surpluses went away, and deficits came back and festered. Then, the financial crisis brought $1 trillion deficits and ballooning debt.
But people remained at least somewhat calm, because the economy gradually recovered and the deficits subsided somewhat. This year, though, it really is time for Washington to be shocked into action. Why? Because the nation’s economic recovery is almost complete, but the budget is getting consistently worse. The budget is approaching two milestones on the road to hell.
The first is that in fiscal 2020, if the projections prove true, the budget will record yet another $1 trillion deficit and it will be the first of an endless string of deficits at $1 trillion and more. The second milestone is that 10 years from now, if the recent temporary tax cuts are made permanent, which their ardent advocates insist will happen, the federal government’s debt to the public will exceed its income.
In economese, the ratio of debt to GDP will exceed 100 percent. This will be the highest our debt burden so measured has been since the end of World War II, when the nation was fighting for its freedom and the federal government borrowed anything, money especially, that would help us to make it through. Today, the economy is comfortable in a mature economic expansion. It doesn’t get any better than this, but today the nation is borrowing essentially as it was when our people were shedding blood.
To be honest, there is no necessary consequence to a $1 trillion budget deficit, or to a public debt that exceeds 100 percent of a nation’s economic output. These are the ends of the earth in the same sense that many people 70 years ago believed that if an aviator exceeded the speed of sound, his or her ears would fall off.
Chuck Yeager in his Oct. 14, 1947 flight proved that superstition wrong. The federal government ran four $1 trillion deficits in the depths of the financial crisis, and the public debt exceeded 100 percent of GDP for three years at the end of World War II, and the federal government’s ears didn’t fall off, either. Truth be told, there is no visible concrete wall for the federal government to run into. It needs only to maintain favorable investor psychology. The danger is that investor psychology is fickle.
A true financial crisis would not require that all investors run out simultaneously to sell all their Treasury bonds. Disaster requires only that enough investors resolve not to buy any new ones, and at the rate the Treasury needs to sell bonds, that would surely suffice. So what would it take to upset investor psychology enough to dampen the demand for Treasury bonds? Would a $1 trillion deficit do it? How about a ratio of debt to GDP approaching or exceeding 100 percent? Who knows? But more importantly, what responsible public steward would want to find out?
By the time you know, it will already be way, way too late. We already know that large budget deficits crowd out business investment, and therefore slow economic growth. Now our supposed leaders in Washington propose to test the outer limits of our worst budgetary experience, and they only hope that investors will remain calm. Chuck Yeager, test pilot that he was, would never take such a risk.
Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Sen. Bill Bradley (D-N.J.) on his efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”