Why eliminating the national debt alone would not fix America's fiscal woes

Even a magical zero debt to GDP situation is not sustainable if the unsustainable paths in the fiscal outlook are not changed.

OK. In my last post I did not mean to suggest that the US doesn’t have a problem with our federal debt–in fact, just the opposite. I was trying to say that the reason we do indeed have a big and very serious and very real problem has little to do with the particular level of debt to GDP (whether gross or net) that we are at today. And while having a goal of staying under a particular level of debt to GDP at a certain date in the future would serve as a useful “checkpoint” or “weigh station” (as I have suggested the 3 percent of GDP deficit by 2015, which happens to be the fiscal commission’s short-term goal, would be), it would certainly not be sufficient to say “phew! well, I guess we dodged that bullet.” It might not even be necessary, actually, but without those shorter-term “checkpoints,” the rest of the necessary fiscal path to sustainability would be much tougher.

The day before my last post, I had been interviewed by NPR’s David Kestenbaum, who asked me to comment on the phenomenon of the few thousand private citizens who voluntarily make donations to the federal government to reduce the national debt. My first reaction was “who are these very generous people who are doing something so contrary to their own self interest?” The problem of fiscal irresponsibility has a lot to do with the “free rider” problem when it comes to the actual or perceived disconnect between any one individual’s government services received and the taxes they pay, after all. My second reaction was that the few million dollars collected through such donations is such a small drop in the bucket when the debt is trillions of dollars, and if these people really wanted to make a donation that would effectively be “mega matched” and thus make more of a difference, they should give to organizations that promote fiscal responsibility as a “movement” from the grassroots up–organizations like, well, the Concord Coalition, for example. (The one person who donated $1.5 million could have sustained the entirety of the Concord Coalition’s payroll for a year, by the way.) But I digress into my own self-serving thoughts…

One of the first questions David asked me was (something like): well, couldn’t we just pay off all of the national debt today, by (somehow) collecting an average of about $40,000 per person? (David’s $40,000 figure signaled what he was proposing to do was to pay off the $13 trillion in gross debt, not just the net–in other words, repaying the trust funds and not just our creditors.) To which I responded that it might be theoretically possible to do that, but economically it would be stupid; unless it were done very progressively such that only old and idle wealth were confiscated (rather than income), it would cripple the economy. (Note that the $13 trillion in gross debt is about 90 percent of GDP.) And not only would it be economically unwise, it would be grossly unfair to current taxpayers, because the debt is something we’ve been accumulating since the start of our nation, so why should it all be paid back by only those currently alive–no matter how rich some of them may be?

But let’s assume we could do it without destroying our nation; let’s assume we could go “poof” and wipe the debt slate clean. What would paying off the debt entirely today accomplish in terms of fiscal sustainability? Not nearly as much as it would seem. Unfortunately, reaching even zero debt does not eliminate what’s “unsustainable” about our fiscal outlook. We would start with a clean slate, but right away our debt would start accumulating again–because the dynamics of the fiscal outlook would still be all wrong: promised entitlement benefits would still be growing too fast for the economy and revenues to keep up. While without any debt we’d eliminate about $200 billion in net interest this year, the rest of mandatory spending alone–without counting any discretionary spending–would still use up nearly all of our revenue. So even having “zeroed out the debt clock” we would still have a large deficit right away this year, immediately starting the debt clock back up again, and that new debt would be immediately projected to keep growing faster than GDP–the definition of an “unsustainable” fiscal outlook.

So even a magical zero debt to GDP situation is not “sustainable” if the unsustainable paths in the fiscal outlook are not changed.

Conversely, a high debt to GDP situation, while not ideal (because of the interest burden), might still be “sustainable” if the economy is on a growth path that manages to keep pace with the gap between spending (including interest) and revenues. That’s a big “if” though. Which is why when I said that there’s no such thing as an unsustainable level of debt to GDP (at any one particular point in time) I didn’t mean to imply that a high level of debt to GDP couldn’t be consistent with a completely unsustainable path of debt to GDP over time. What I’m trying to say is what defines that unsustainability isn’t where we are right now but what we’re doing (or not) to change where we’re headed.

So, yes, we should talk about checkpoint/weigh station goals like getting net debt to GDP stabilized at some level not too far from where we are now–which is 60 percent of GDP–but not because that level of debt is anything that special or significant or sufficient for fiscal sustainability, but because to stabilize at the level of debt where we’re at now, we’ll have to start changing policy paths now–emphasis on policy and paths and now. And the sooner we start the better, or else we’ll be perpetually counting on the economically foolish and grossly unfair idea that future generations will have to eliminate all our debt “tomorrow.”

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