Former Congressional Budget Office chief and Bush economic adviser Donald Marron asks for suggestions on his blog about how to drive home the impact of the $1.4 trillion deficit to the general public. It's an important question.
The difficulty of getting people to care about deficits was on display at Tuesday's Senate Budget Committee hearing on the need for a bipartisan deficit commission. Here is Chairman Kent Conrad, D-N.D., giving it a shot (pdf):
"I want to remind everyone of the dramatic deterioration we have seen in our nation's budget picture. The final deficit total in 2009 was $1.4 trillion "” not million, not billion, trillion. That should sober us all "” $1.4 trillion. Looking over the next 10 years, we see a sea of red ink."
Is everyone now sober "” or asleep?
There was a lot of talk at the Senate hearing about the U.S. nearing a fiscal tipping point that could lead to catastrophe. Rep. Jim Cooper, D-Tenn., among others, warned that the loss of international confidence in U.S. creditworthiness "could even make the current financial recession look like a sideshow."
There is surely reason to worry about this worst-case scenario, and we should hope that bipartisan talk of this sort will be enough to spur the public "” and Congress "” to get serious about fiscal responsibility. But stark warnings may be a poor substitute for tangible evidence. As Morgan Stanley's Richard Berner noted earlier this year, "The problem, ironically, is that the day of reckoning hasn't come. This has seriously undermined doomsayers' credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies."
The problem with vague warnings that carry no clear timetable is the implication that the consequences of high debt levels may be well down the road, whereas the consequences "” both political and economic "” of doing some about the deficit may be right around the corner.
So what tangible evidence is available? A fairly common technique is to divide federal debt levels by the U.S. population to determine the share for each man, woman and child. Sen. Bayh did this the other day, arriving at a figure of $39,000 per person (pdf).
This approach suggests the potential for an individual to feel the consequences of high debt levels "“ though only if the country decides to pay back its debt. But no one is talking about paying down debt, and "” at least for now "” President Obama has promised not to raise taxes on households earning less than $250,000.
What might be the most persuasive evidence to argue for fiscal discipline "” the threat of higher interest rates "” does not appear to be a clear and present danger in the government scorekeeping that sets the terms of debate in Washington. On the other hand, in the same piece cited above, Morgan Stanley's Berner noted, "Standard estimates suggest that a 20-point sustained increase in debt/GDP "” what we will experience between 2008 and 2010 "” will boost real rates by 70-110 basis points."
this measure, the difference between a debt level near 40% of GDP in 2008 and a projected 82% of GDP under President Obama's budget in 2019 would range from a roughly 1.4-percentage-point to 2.2-percentage-point increase in real interest rates, which would be a big deal. Yet CBO offers no similarly clear standard and CBO rate projections don't appear to factor in a comparably strong impact from projected debt levels.
All this means that making a convincing case for taking fiscal action probably must be done within the context of CBO's 10-year budget projections, as imperfect as they are. Just a short time ago, this would have been impossible to do. As recently as 2008, CBO projected a balanced budget by 2012 under President Bush's never-adopted proposals and continued economic growth.
Unfortunately, the budget news has become so bad so fast that the danger of continued big deficits is now readily apparent within this short time frame. As Rep. Cooper put it, "Sadly, the long term is not very far away anymore."
So what tangible evidence is available within CBO's projections of President Obama's budget?
Here is one key datapoint: From 2008 to 2019, federal revenues are projected to grow by $1.45 trillion, but extra interest payments on the public debt of $550 billion will soak up nearly 40% of those extra tax dollars.
Here is another: Consider that in 2008, Washington spent about half as much on interest payments ($253 billion) as it did on the nondefense programs that it budgets on an annual basis ($508 billion).
Those nondefense outlays cover homeland security, education, job training, housing assistance, veterans' health, science, workplace safety, transportation, the environment and foreign aid.
But by 2019, interest costs would reach $800 billion under the Obama budget compared with $720 billion in spending on nondefense discretionary programs.
From 2008 to 2019, interest costs are projected to grow more than twice as fast as the economy, from 1.8% of GDP to 3.8%. That extra 2% of GDP is roughly equal to the projected cost of Medicaid in 2019.
Meanwhile, spending on those discretionary programs would shrink relative to the size of the economy as interest costs consume 20 cents for every dollar in tax revenue, up from 10 cents in 2008.
All this is before the entitlement crisis turns really ugly in the following decade. And all this is in the president's budget, which no one has argued presents a picture that is too pessimistic.
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