August 27, 2016
Both parts of the that headline are true, although the Post did not connect them in exactly this way. It’s editorial instead highlighted the debt-to-GDP ratio, trying to hide from readers the fact that the real burden of the debt is near a post-World War II low.
This is a classic case of the ends justifying the means. The end here is to cut the Social Security and Medicare benefits of middle income retirees. The Post sees this as the obvious policy option to pursue in a context where there has been a massive upward redistribution of income over the last four decades. And if they have to use a bit of deception to get there, well that’s okay.
The piece begins by telling us the horror story that the Congressional Budget Office projects that the deficit will rise this fiscal year from its 2015 level, the paragraph ending:
“The bigger deficit will push the national debt to 77 percent of gross domestic product, the highest level since 1950, this year.”
Of course if we didn’t have hysterical editorials from the Post and the professional deficit hawks we would never have any clue of the fact that we are seeing the highest debt-to-GDP level since 1950. A large debt can have negative effects in two ways.
First, it can mean a high interest burden. This means that we would be diverting a substantial portion of GDP from other purposes to pay interest to the owners of government bonds. This issue is assessed not by looking at the size of the debt, but rather the size of the interest rate payments. Currently interest payments measured as a share of GDP are a bit less than 0.8 percent, after subtracting the interest payments that are refunded by the Federal Reserve Board to the Treasury. By comparison, the interest burden was over 3.0 percent of GDP in the early and mid-1990s. In other words, that one doesn’t come close to passing the laugh test. (This information is available in the same CBO report cited by the Post.)
The other way that the debt/deficit can pose a problem is by creating too much demand in the economy. This leads to higher interest rates and/or higher inflation. The effect of higher interest rates would be to crowd out investment and thereby slow the rate of productivity growth, making the economy poorer in the future than it otherwise would be. Higher inflation will eventually require the Fed to raise rates to prevent it from accelerating out of control.
This story clearly does not describe the U.S. economy over the last eight years. In fact, the vast majority of economists would agree that the economy’s main problem over this period has been a lack of demand. In addition to massive unemployment, weak demand has also resulted in a reduction in investment. This falloff in investment, coupled with the drop in the size of the employable labor force, has led CBO to drop its estimate of potential GDP for 2016 by almost $2 trillion (in 2016 dollars) from it pre-recession estimate of 2016 GDP.
Even if we assume that CBO was hugely over-optimistic in its 2008 projection so that just half of this falloff was due to impact of the downturn, it would imply that the slow growth of the last eight years cost us $1 trillion in annual output or more than 5.0 percent of GDP. From the standpoint of people’s living standards, this loss of output of 5.0 percent of GDP is the same as an increase in taxes of 5.0 percent of GDP, which would imply an increase in tax of more than 25 percent from current levels. The situation is made worse by the fact that the losses are being felt disproportionate in lost wage income by those at the middle and bottom of the wage distribution.
It is unbelievably hypocritical of the Post and other deficit hawks to claim that they are concerned about the threat that deficits pose to our children’s future when they completely ignore the extent to which the policies they have demanded (lower deficits) actually impose a far higher cost. It is quite clear that the agenda of the Post and their fellow deficit hawks is redistributing income upward. Their guiding philosophy is that a dollar that is in the pocket of a poor or middle-income person is a dollar that could be in the pockets of a rich person.
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