Debt Armageddon can at least be delayed
Quin Hillyer
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No matter what your position on the tactical and practical options related to the federal debt ceiling, we all should agree the debt itself is a major threat to economic stability.
Both political parties should work to ward off that threat.
WHAT THE HOUSE GOP COULD DEMAND IN DEBT LIMIT STANDOFF
We conservatives favor a much more aggressive approach to debt restriction, and overall systemic reforms, than liberals, but in a national government with a partisan power divide, the measures we think ideal have no chance of being implemented in the next two years. What can and should be done, though, is to send the ratio of federal debt to the entire economy, meaning to GDP, on a glide path descending to more sustainable levels.
Right now, total debt-to-GDP stands above 120%, and the ratio of “debt held by the public,” in other words, not counting intra-government transfers, is approximately 100%. Just 15 years ago, the latter figure was below 40%. Anything over 100% is serious danger territory. And the U.S. debt does not even include unfunded future liabilities, which more than triple the burden on future generations and on the full faith and credit of the U.S. government.
If Congress and a wildly profligate President Joe Biden can’t agree actually to balance the annual budget, which they should, or even to cut nominal dollars, there are still things they can do to reduce the proportion of debt to the overall economy. Neither side would be entirely happy with the grand bargain that would ensue, but if both sides agree, then the blame and credit would be apportioned equally and the political fallout would be negligible. That’s what happened in similar circumstances when President Ronald Reagan and leaders of both parties agreed to a big compromise to save Social Security’s solvency in 1983: Neither party gained nor lost appreciably in the polls, the lawmakers extended the program’s health by some 40 years, and the immediate economy suffered no ill effects.
The general approach to a deal to buy some time should be obvious. (Eventually, far greater systemic changes will be necessary, but at least the day of reckoning can be moved back by a decade or so.) It would first involve a hard cap on total domestic discretionary spending at current levels for several years and then no more than an inflationary rise for several years after that. (Republicans want actual cuts, and Democrats want no caps, so this is a compromise.) Previous caps held for a while in the late 1980s and again after a 2011 budget deal, so there’s no reason Congress can’t abide by them again.
The bigger “savings,” though, would come from temporary restrictions in the formulas for inflation adjustments in tax brackets and in entitlement spending, along with tiny (tenths of a percent) adjustments, involving some trade-offs among corporate taxes and payroll taxes, in tax rates and policies. Even something as small as back-to-back years of subtracting two-tenths of a percentage point from cost-of-living adjustments could save tens of billions of dollars.
The idea is to spread the “burden” of the adjustments evenly across income groups while keeping them so small that A) most people don’t even notice them and B) they don’t jolt the economy into a recession or even a mini-panic.
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Meanwhile — and this is absolutely crucial — lawmakers should adopt pro-growth policies, including restrictions on new regulations with major economic costs. If government spending remains relatively flat while the economy grows, then the same debt represents a smaller percentage of the economy. The smaller the percentage, the more manageable, even if the debt remains the same in nominal terms. The goal should be a public-debt ratio below 75% by, say, 2030. That’s achievable if government debt rises only slowly while the overall economy merely grows as much in the next seven years as it did in the prior seven.
This is all readily doable, people. Let’s do it.