Deficits come home to roost

Last week, the bipartisan Congressional Budget Office updated its estimates for the federal budget deficit. CBO now estimates deficits in excess of $1 trillion for next year, and every year thereafter for the next decade. Twenty-one cents of every dollar the federal government spends is borrowed, and that will remain true for the next 10 years (the outer boundary of the CBO estimate).
These annual deficits add to the total debt the federal government owes. As a nation, we owe $22 trillion today, of which $6 trillion is owed to federal trust funds, like Social Security. At the end of the next decade, we’ll have added another $12 trillion. The debt owed to the public is now 79% of our nation’s annual gross domestic product. In 10 years, CBO estimates, it will hit 95%, the highest percentage of GDP it has been since World War II.
Why does the national debt matter? For one thing, it is increasingly owed to China. Of the $16 trillion federal government debt not owed to the federal trust funds, China owns $1.2 trillion. China could crash the U.S. economy if it chose to dump all $1.2 trillion of U.S. bonds on the market at one time.
The federal government will need to find another buyer for the bonds that China is purchasing. Without such a large buyer, bond prices will have to fall — and that means the U.S. would have to pay higher interest on its bonds, causing higher interest rates throughout our economy.
This threat is not taken seriously because China would lose so much in taking this step. But an autocracy can manage domestic consequences better than a democracy. If something vital to China were at stake — like the status of Taiwan — there is no reason to doubt it would use this weapon we have placed in its hands.
The national debt also matters if America were faced with a national crisis that required more federal spending. If we hadn’t sold so many bonds already, there would be more room to sell bonds, without pushing up the interest costs that America has to pay.
There is a moral dimension to America’s growing debt as well, though it receives less attention. The debt exists because we have chosen to consume now and make our children pay the interest bill for years to come. The next generation will have emergencies of their own to pay for — possibly related to climate change that escalated on our watch but will have the most serious repercussions on theirs.
If the debt were incurred to create structures of permanent value to the next generation — great public universities, better roads and airports — it could be justified. Instead, the soaring deficits have come about not from lasting investments, but from tax cuts, higher entitlement payments and military expenditures in Iraq and Afghanistan.
From past and recent behavior, it is unrealistic to believe our nation’s leaders will pay attention to these dangers. The agreement between President Trump and House Speaker Nancy Pelosi on July 22 was one reason for the higher debt estimate by CBO. That agreement lifted caps on spending that had been set by formula in 2011. Over the last eight years, every time the 2011 caps threatened to come into effect, Congress voted to waive them.
“Reagan proved that deficits don’t matter,” Vice President Dick Cheney said in 2003. From all indications over the intervening 16 years, leaders of both major parties agree.
There used to be some head-wagging by fiscally conservative Republicans when deficits were reported to have grown. Now there is not even that. Because it averted a government shutdown, the lifting of the caps in July was applauded by Trump and Pelosi, as well as by Senate Majority Leader Mitch McConnell, Senate Minority Leader Charles E. Schumer and House Minority Leader Kevin McCarthy. None of these politicians has complained about the consequences for our debt.
If there’s any bipartisanship left in Washington, it appears to be a joint willingness to ignore the economic and national security risk created by growing deficits and debt as far into the future as we can see.

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