Con: Congress must control spending, stop huge budget deficits
Congress is now debating whether to increase the national debt once again, less than two months after its last vote to increase the debt. History suggests that the debate is largely a charade.
The United States needs to get control of its budget and stop running huge deficits. But politicians find it easier to increase the debt ceiling.
The statutory debt limit is supposed to keep a lid on how much the federal government can borrow, but it has failed to do that. Since 1940, Congress has voted 90 times to increase the limit, extend the duration of a temporary increase, or change the definition of debt subject to the limit. Just since 2002, it has raised the limit nine times and nearly doubled the Treasury’s borrowing authority, from $6.4 to $12.4 trillion.
Every time Congress sets a new limit, the government quickly reaches it, and Congress responds by raising the limit again.
So the question is not whether Congress will raise the debt limit. The question is who will finance the huge federal budget deficit—the annual shortfall between spending and tax revenue—that is forcing these increases.
The national debt is the sum of all the budget deficits—minus a few budget surpluses—the federal government has run over the course of American history.
A deficit occurs when government spending exceeds tax revenues. To make up the shortfall, government must borrow in the capital markets by issuing new Treasury securities.
Even before the recession, the federal government had been spending about $3 trillion a year, while collecting “only” about $2.5 trillion in taxes. As a consequence, the national debt nearly doubled, to about $10.7 trillion, during the Bush administration.
Many economists view such deficits as “manageable,” as long as they can be kept within 3 percent of annual output, or gross domestic product. The recent recession and the bailouts of banks and Detroit pushed the deficits to more than 10 percent of GDP: $1.4 trillion last year, with an additional $1 trillion-plus expected this year.
According to Obama administration officials, anticipated budget deficits over the next seven years could double the national debt still again.
For the moment, there’s an artificial and even surreal calm about a deficit equal to 10 percent of GDP, growing at $1 trillion a year. Defenders of the status quo believe that with unemployment at 10 percent, this is no time to rein in the budget by raising taxes or cutting spending. We can do that later, they say, when the economy improves.
But the surge in debt financing will make it more difficult for the economy to improve, as more tax dollars go to finance interest payments, leaving fewer dollars for other federal programs.
A second storm cloud is the aging of the baby-boom generation, Americans born between 1946 and 1964. Demographic pressures on the budget have begun to grow as the first baby boomers start collecting Social Security and become eligible for Medicare in 2011. Social Security and Medicare already account for about a third of all federal expenditures, and their share is growing. If the government borrows money to pay these long-promised benefits, as seems likely, federal debt could skyrocket.
A third challenge is the growing reluctance of foreigners—notably China—to finance the deficits by acquiring ever-more Treasury securities.
The solution to such tensions is painfully obvious: control spending and stop running massive deficits.
But as we are about to see once again, as Congress debates raising the debt limit, that obvious solution is politically beyond Washington’s grasp.
R.D. Norton is a senior fellow at the American Institute for Economic Research, 250 Division Street, Great Barrington, Mass. 01230; Web site: www.aier.org.