David R. Henderson  

The Reps' and Dems' Utter Unseriousness About the Major Long-Term Economic Issue

What if everything doesn't go ... Harry Markowitz on Armen Alchi...


I watched much of the Republicans' and Democrats' conventions, as my long-suffering wife can ruefully attest to, so that you didn't have to.

What you have may heard about the Republicans' convention is that it was so negative and dark. With few exceptions, that's true. What you may have heard about the Democrats' convention is that it was optimistic. With the exception of their fear of guns and global warming (the two g's, if I were to put it in Nancy Pelosi's lingo), that's true.

But what both conventions should have been negative about is something that was scarcely mentioned: the large and growing U.S. federal government budget deficits ahead and the resulting large and growing U.S. federal government debt, debt that will grow as a percentage of GDP. Both parties were utterly unserious about this--and the unseriousness was most obvious in Hillary Clinton's pledge to expand Social Security rather than to contract it.

Here's the Congressional Budget Office, in a recent statement "The 2016 Long-Term Budget Outlook," July 12:

If current laws governing taxes and spending did not change, the United States would face steadily increasing federal budget deficits and debt over the next 30 years, according to projections by CBO. Federal debt held by the public, which was equal to 39 percent of gross domestic product (GDP) at the end of fiscal year 2008, has already risen to 75 percent of GDP in the wake of a financial crisis and a recession. In CBO's projections, that debt rises to 86 percent of GDP in 2026 and to 141 percent in 2046--exceeding the historical peak of 106 percent that occurred just after World War II. The prospect of such large debt poses substantial risks for the nation and presents policymakers with significant challenges.

In 2046, according to the CBO, federal spending on major health care programs will be up to 8.9 percent of U.S. GDP, up from 5.5 percent today, and Social Security spending, without Clinton's proposed expansion, will be up to 6.3 percent of GDP, up from 4.9 percent today. The other big hunk: net interest on the debt, at 5.8 percent of GDP, up from 1.4 percent of GDP today.

I gave a talk at Santa Clara University in the middle of last decade titled: "Social Security: The Nightmare in Your Future." It was my way of saying to young people that they should pay attention to what their elders are doing.

Both Clinton and Trump would make that situation worse, Clinton by a little, Trump by a lot. There is this main difference: Trump would make it worse mainly with tax cuts; Clinton would make it worse solely with increases in government spending.

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COMMENTS (16 to date)
Phil writes:
Both Clinton and Trump would make that situation worse, Clinton by a little, Trump by a lot.

According to the Committee for a Responsible Federal Budget, "The nonpartisan Congressional Budget Office (CBO) projects that,under current law, nearly $10 trillion will be added to the debt over the next ten years, bringing debt to 86 percent of GDP by 2026. Clinton would add a further $250 billion to the debt over a decade, [...] Trump would add $11.5 trillion by 2026."

One of them is 46 times less serious than the other.

Brad D writes:

Is it possible that we've become desensitized to the impending economic perils? During the 2008 financial crisis, and immediately thereafter, we were warned on an almost daily basis that inflation would ensue as a result of the Fed’s monetary policy. The pundits were very wrong. We were warned that running trillion dollar deficits would surely bring ruin to the dollar and US economy. It didn’t, at least not yet. We were given similar warnings on Obamacare too.

Maye the public has grown tired of hearing the media cry wolf.

Tom Church writes:


The crazy thing is that Social Security isn't nearly as much of a problem as either Medicare or interest payments on the debt in terms of cost growth.

In thirty years, CBO projects net interest on the debt to be 5.8 percent of GDP. Social Security is barely ahead at 6.3 percent of GDP.

That's up from 1.4 percent and 4.9 percent respectively.

We need some cost control, pronto.

JVM writes:
Trump would make it worse mainly with tax cuts; Clinton would make it worse solely with increases in government spending
…not so fast, looks like he's got big plans to spend too! Hot off the presses:
Donald Trump on Tuesday proposed a plan to rebuild U.S. infrastructure that costs “at least double” the amount that Hillary Clinton has floated, in what would amount to a massive new government program.
Khodge writes:

How serious or not each party is will be dependent on congress, not the president. To all appearances, Trump is not popular with the Republicans and will not be able to pass whatever agenda he may have. Clinton is truly the wildcard here. She is not so out of step with her party. On the off chance that Democrats take both houses of congess, the nation will truly be in trouble.

Amelia Roster writes:

It is very disappointing to see that neither of the parties are giving much thought on the future of economy. It seems they didn't learn anything from the '08 recession. The only way to salvage this situation is to create more awareness among the people.

AntiSchiff writes:

Dr. Henderson,

Who cares? The markets don't. If you know better than the markets, then you should be able to profit from that fact. I have a feeling you won't.

Even under the projections you mention, the US debt is still a good bit smaller than Japan's is today, as a percentage of GDP. Is Japan in any danger of insolvency? Again, there's no indication the markets think so.

Think about it this way: even most American households have a much higher debt/income ratio than the US debt/GDP. Most have mortgages at 3-4 times annual income, at least, along with car loans, credit cards, student loan debt, etc. Yet, the majority of Americans remained solvent, even during the Great Recession.

The US government also has the ability to raise its income at will, within limits, and to print money.

So, the US debt and deficit are not problems and likely will not be problems, period. The US could handle far higher debt loads than current projections indicate likely, and hence interest rates are very low going out 30 years.

S D writes:

The dollar is the world's reserve currency, the US maintains control over its own interest rates and the majority of public debt is held domestically. There is never any meaningful risk of default.

The future is not nightmarish, at worst it will just look like Japan does today. A high-productivity economy with a large share of older people who need a) need more spending; b) are unlikely to be working.

By global standards is Japan a bad place to be a young or old person in 2016? Not in the slightest.

The US is indeed likely to do slightly better than Japan in my view: higher natural fertility and greater openness to migration means more people to pay taxes and work in low-productivity services needed by older people.

Hazel Meade writes:

AntiSchiff, the relevant income measure for comparison is not GDP, but the amount of tax revenue the US government takes in.

The federal government takes in $3.3 trillion in tax revenue. Debt is around $18 trillion.
So the debt/income ratio is about 550%.

David R. Henderson writes:

Hazel Meade is right about the relevant measure. I used deficits and debt as % of GDP only to norm the data. But because, at least hopefully, the government does not have access to all the GDP, the relevant income measure for government is tax revenue, not GDP, if you want to make an analogy with American households. Moreover, almost all those mortgages you refer to now are less than the value of the houses that are collateral. The U.S. federal government’s land and other assets, by contrast, are relatively small compared to the debt.

ThaomasH writes:

The projections of budget deficits do indicate that taxing and spending decisions may not be optimal. We will need to rigorously apply the criterion of spending now to obtain future benefits when, but only when NPV>0. Unfortunately the "deficit" as an issue got badly mixed up in short term politics so that we had people advocating deficit reduction notwithstanding that the recession and low long term interest rates ought to have meant that many more investments passed the NPV test so that those investment would reduce the debt/income ratio.

Increasing social security payments are mainly a matter of shifting consumption among people. We ought to replace SS (and Medicare-Medicaid) financing from a tax on wages to a tax on consumption, partly on carbon emissions and partly with a progressive personal consumption tax.

David Condon writes:

I think the relevant issue is what they will do rather than what they say they will do. Trump I believe intends to waste most of his political capital on an immigration bill which will ultimately fail. He's going to take a hardline position against China. He won't lower taxes. He'll also struggle to get qualified people working for him which is what worries me most.

Clinton likes to avoid headlines. She'll focus on small ball issues, and keep most of her slack in reserve. It's hard to say what, if any, major legislative initiatives she'll take on.

LD Bottorff writes:

The choice is like choosing between two dentists, one of whom has no experience, the other has lots of experience but consistently drills the wrong teeth.

Oh, and we don't get any anesthesia.

Yaakov writes:

The politicians will only stop when they see big trouble ahead. When will that happen? If I understand correctly, trouble can come in either:
1) inability to service the debt
2) inability to convince investors to buy US bonds
3) public outcry on the debt level

From the Japanese experience, it seems that 2) is still a long way ahead. Option 3) seems unlikely as long as 1) and 2) do not happen. 1) is very far as long as interest rates are low. Will interest rates rise?

AntiSchiff writes:

Dr. Henderson,

You make some good points, and I accept your correction on my point about debt/GDP and the comparison to households. However, the point remains that to act as if this is an important issue is to argue directly with markets.

What has happened to the Treasury yield curve this year, for example? It's flattened. Despite the slight increase in the interest cost of servicing short-term Treasury debt, long-term yields have fallen disproportionately.

Further, again I mention that Japan has roughly double our debt/GDP ratio, and has even lower interest rates on its debt than the US, and that's despite demographic factors that are leading to Japanese GDP potential to shrink.

So, I think it's safe to say that if you are a strong advocate of free markets, you should respect their judgements on the credit worthiness of the US and Japan.

I'll go even further to question the priority you place on the deficit and debt, particularly. Holding the current deficit projections and debt constant, improvements in economic growth taking the US anywhere near the long-term 5% NGDP growth rate would dramatically improve the US debt situation, even given what would presumably an associated rise in interest rates.

AntiSchiff writes:

To summarize, the best way to deal with the deficit and debt problems is to boost growth, via better monetary policy.

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