The debt problem

Nearly all (sensible) commentators agree that the US national debt is an enormous problem that will only grow in the decades ahead. If you, gentle reader, happen to disagree with this statement, and care to learn more about the subject, please go read this. The short version is that, unless something dramatic changes, by 2020, our debt will be 90% of our nation’s GDP-higher than it was even during World War II. By 2035, under current law, health care costs, Social Security and interest on the national debt will exceed all tax money coming in to the federal government. Yes, that means no defense budget, no money for education, no money for the court system, etc. It’ll all be only interest (not principal) payments to our creditors and support for the old folk via Social Security and Medicare. And of course, all this assumes that our creditors don’t raise their interest rates when they see that they are unlikely to ever be repaid (and if even their interest payments are made, they’ll be made with highly inflated dollars). If they do raise the interest rates, then the debt crisis will come much sooner.

Given the enormity of the changes necessary to fix this problem, a bipartisan solution is necessary. Neither party is able (or understandably, willing) to bite the bullet and unilaterally make the dramatic changes necessary to solve the national debt.

But all hope is not lost-there are quite a few obvious, if not politically palatable, solutions to the debt problem. Entitlements can be means-tested (there’s no need for me to support Bill Gates’ health costs and retirement, after all); the retirement age of eligibility for Social Security and Medicare benefits can rise as human lifespan increases; corporate welfare (especially to polluting energy firms and agribusinesses) can be cut back; the defense budget can be cut (perhaps we could cut back to a military merely 10 to 15 times as big as our nearest competitor instead of 20-30 times); taxes can rise (especially on socially undesirable activities, like carbon and soft drinks); even some form of the value-added tax seems entirely inevitable. After reading all this, a compromise between the Democrats and Republicans seems quite clear-the Democrats give up some spending on entitlements, the Republicans agree to some tax increases (preferably targeting consumption and carbon rather than work and investment), both parties agree to take on defense spending and corporate welfare, and the debt crisis is averted.

So why haven’t the parties agreed to something like this? Why does it seem like we’re farther than ever from a solution to the debt problem? I think the answer lies in the “time-commitment” problem. Political scientists are quite familiar with the problem in international relations for democracies, that as governments change, their international commitments may also change. Republicans may have a different view towards Israel than Democrats, etc. Therefore, it’s difficult for one leader to bind the nation long-term; his/her rivals may take power in the next election cycle and break those commitments. Of course, there are ways around this, treaties being one of the most prominent.

Our debt necessarily requires a long-term solution, since as the chart at the above-link demonstrates, most of the increase in spending happens in the future as the current Baby-boomer generation becomes eligible for Medicare. Cutting the current budget would barely put a dent in the future debt. Moreover, you don’t have to be much of a Keynesian (and believe me, I am certainly not much of one) to realize that cutting the budget during our current economic crisis will have a very negative effect on the economy, and thus the future tax base and economic growth that will be a necessary piece to pull us out of the deficit.
Therefore, both parties must be willing to make commitments about tax rates and spending levels well into the future, when the debt would otherwise really be a problem.

The rub, of course, is that neither party trusts the other one to maintain these compromises once it seizes power. This difficulty was clearly illustrated in the health care reform debate, when the Democrats said “the health care plan cuts medicare payments by half a percent each year for the next 20 years-look at how much that will help the deficit!” The Republicans said “we’ve seen this movie before-congress promised to cut doctor’s compensation in 1997, and it was reversed by each congress every year because the special interest groups triumphed and the doctors’ lobby was quite powerful-what will make this time any different?”
Government spending, once put in place, tends to be nearly impossible to reverse. The Republicans believe, for good reason, that any agreement they make now about cutting spending will not really be implemented when the time comes for it. Thus, the GOP doesn’t want to make any compromise that involves a promise of cutting future government spending in exchange for tax increases-they think the tax increases will happen and the spending cuts won’t. This belief is strengthened by the fact that the federal government has steadily grown during the lifetime of all the lawmakers currently in Congress.

Likewise, the Bush tax cuts were supposed to expire after a 10 year period. Now, no one thinks that even a Democratic congress and a Democratic president have the gumption to let them all expire (at best, a few of the tax cuts for the wealthy will expire). The political stigma of being seen as “raising taxes” is too powerful. And so, the Democrats fear, for good reason, that when the time comes, the GOP will bash them as raising taxes and only cut spending. Therefore, the Democrats don’t want to cut any spending with the promise of future tax increases-they’re afraid the spending will be cut, and then the tax increases will be cut to pieces.

Even if both sides were negotiating in entirely good faith, they couldn’t swear that future congresses wouldn’t undo all their good intentions. How could they, after all-they might not be around for those future congresses. Any bill they pass now could be undone by future irresponsibility from the other side, or even their own side. And in that case, all of the painful political concessions they make now would have gone for naught, and perhaps would only empower the opposing political party.

And of course, this calculus leaves out the interest groups of both parties who oppose both spending cuts AND tax increases.

Neither side is being entirely irrational. And yet, their combined rationality I fear makes the debt crisis inevitable. Of course, I hope I’m wrong, but I don’t see a plausible political solution. Do you?

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About irreparabiletempus

God have mercy on me, a sinner.
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3 Responses to The debt problem

  1. bobozou says:

    the time-honored solution of choice is….

    inflation

  2. Pingback: Robespierre: Fatal Purity | Irreparabiletempus's Blog

  3. Pingback: The Tax Cut Deal (and a long rant about economic inequality)* | Irreparabiletempus's Blog

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