Suddenly, there is a great deal of concern about America’s federal debt, not only among the Chinese to whom a great deal of it is owed, but also among older generations of Americans, who worry that growing debts will hurt the federal government’s ability to provide them with everything they have promised themselves, without quite being willing to pay for it. A few years ago, many of our members of Congress were wholeheartedly in favor of adding a prescription drug benefit to Medicare and not paying a cent of it, funding it entirely with borrowing to be paid back by someone someday. Now many of those same members of Congress say we cannot do anything for the health care of those under age 65, who if they are fortunate to be working actually pay for Medicare, because the federal deficit is too big. This week’s edition of the The Economist concedes that younger generations will have to pay higher taxes than whose who came before, but also asserts that those who now expect to receive Social Security at age 67 (instead of the 65 older generations received) should instead get nothing until age 70. Perhaps, according to this source, they could be forced to wait until age 70 to collect Medicare as well, “so they will have to work longer.” Conveniently ignoring the fact that as it is businesses are more willing to hire those age 65, with federal health insurance, than those age 60, uninsured and with high average health care costs.
One of the few capabilities I have that is better than most of my peers is my long-term memory. It doesn’t get in there easily, but when it does get in, it seems to stay there. For those of you who, in contrast, can remember the name of the person you met ten minutes ago but not the early 1980s, I thought I might provide a few reminders of what prominent people said about America’s federal debts in the past, while they were running them up and enjoying the proceeds. In each case politicians, and wonks seeking employment with them, provided rationalizations for growing debts. Excuses more like it. Providing rationalizations and excuses, in fact, seems to be the job requirement of a successful wonk, actuary, bond rater, appraiser, mortgage broker, securities underwriter, etc. etc. etc.
The first is a very old argument, but some of you may remember some wonks making it: the federal deficit is not nearly as bad as it seems, because state and local governments are running surpluses, and taken together the public sector has a balanced budget. In the 1970s, you see, the federal government provided state and local governments with extensive “revenue sharing,” and picked up more of the cost of infrastructure, social services, etc. That generated federal deficits, but allowed many states and localities to run surpluses and squirrel money away.
Then in the early 1980s the Reagan Administration cut revenue sharing and infrastructure investment (but little else despite big income tax cuts). After a decade or so of state and local frugality, a new generation of leaders including folks like Pataki, Bruno and Silver in New York took over the early 1990s, and began borrowing long-term money to pay for short term needs, and handing out pension enhancements to their generation without funding them. And today? Compared with the early 1980s, the last time the unemployment rate was this high, state and local deficits, and pension deficits, are massive, even as the federal deficit is also massive. So much for a balanced public sector budget overall.
Later wonks provided this rationalization: the federal deficit as a single number doesn’t take into account that some federal spending is for investment with long-term returns, appropriately funded by long-term debt. We need a separate federal capital budget like state and local governments have, those wonks said.
What they failed to acknowledge is that capital assets degrade over time and must be replaced on an ongoing basis, so while it might make sense for an individual or firm to borrow to build the physical infrastructure they will use over their short lives, for ongoing governments physical infrastructure is an ongoing expense, not a one time expense. And today? Somehow after another three decades of the federal “investment,” the infrastructure in most of the U.S. is, in fact, degraded compared with what it was in the early 1970s, a mere decade or two after most of it was built. In fact the infrastructure in large parts of the suburbs and Sunbelt is about where New York City’s infrastructure was in the late 1960s, before large parts of it began to fall apart.
Some might recall this rationalization: “we owe it all to ourselves.” Economists argued that soaring federal debt had no impact on the overall American economy because individuals, realizing their taxes would have to rise to pay those debts back, would rationally save more, keeping the overall savings level unchanged. And since the federal debts were held by other Americans, as some Americans were forced to pay more in taxes to pay those other Americans back (somehow the distributional implications of this were not considered), the overall level of consumer demand in the U.S. economy would be unaffected. Yes, that is what people said.
In reality, since the late 1970s when I was teen, the U.S. has gone from the world’s biggest creditor to the world’s biggest debtor. That too was rationalized at first, with the argument that because assets owned by U.S. residents and businesses abroad earned higher returns than U.S. assets owned by foreigners, our current account was balanced, even if our trade was in deficit. Until the U.S. started running current account deficits as well. Then I read that international financial accounting must be wrong, because there were more countries in deficit than with surpluses. Then I read there was a global savings surplus. Then I read that the U.S. current account deficit reflected foreigners willingness to invest in the U.S. in the expectation returns would be higher here. Meanwhile, the U.S. personal savings rate, considered low at 8 percent in 1980, fell to zero, and most of the money the U.S. borrowed from abroad was used for consumption not investment.
Some looked to trust funds as an excuse for the federal deficit. Yes the federal general fund was in deficit after the progressive income tax was cut of 1981, but the Social Security fund was in surplus because the regressive payroll tax was increased two years later. Taken together, it was said, the total federal deficit and debt was not so bad, the courtiers said to please the kings.
So all the extra money collected for Social Security in the past was spent in the past, with IOUs were deposited in the so-called trust fund. But wasn’t the federal government also running up liabilities, to provide Social Security and Medicare to younger generations when they themselves get old? In a legal sense, no – the Social Security and Medicare legislation specifically says that these programs are not contracts in the constitutional sense of protected contracts, unlike public employee pensions and AIG bonuses. See The Economist for the likely result. Although there was some talk in Congress a few years ago of making them constitutional contract obligations for those age 55 and over at the time, as part of a deal to cut future benefits for those who were younger. Bottom line, when you hear the current federal debt as a share of GDP is only “X,” that “X” excludes money owed to the trust funds, on the assumption younger generations will get far less – or nothing – in old age.
Any new excuses? In the words of Vice President Dick Cheney, "Reagan taught us deficits don't matter." What he meant is that it doesn’t matter to those whose goal is political power, because people don’t understand or care about the future consequences, and will blame whoever is in charge at the time when those consequences arrive. Deficits don’t matter to the generations that matter, and the people that matter.
How about the Democrats? Chicago Mayor Richard Daley sold off the revenues from Chicago’s parking meters for the next seven decades or so, so he could spend most of the proceeds in the next year or two. Future Chicagoans will have to pay to maintain those streets, but will get none of the revenues from those who park on them. Here is Daley’s explanation. He said “he would have been forced to raise taxes or cut services to balance the budget if not for the windfalls generated by the parking meter lease and the $1.83 billion privatization of the Chicago Skyway toll road four years ago.” ‘’The people own the asset to be used today for this generation of people and not for 2050,’ Mr. Daley said soon after the Council’s parking meter vote last December. ‘Our responsibility is to help the generation right now.’”
The assets to be cashed in right now were created by those who came before, not by the people who are benefitting form selling them right now. And they are being sold out from under those coming after, in Chicago and elsewhere. Those aged 30 today will be 80 in 2050, and in need. Their children will, perhaps, be around age 50, their unborn grandchildren perhaps age 20. For them, deficits do matter, but for Cheney and Daley’s generation, apparently not. Got to love the honesty in the City of Broad Shoulders. No rationalization or excuse. Just we want it, we took it, go to hell.