The GOP Loves to Scream about the National Debt

Answer the Question, is the country better off today than six years ago when President Obama became President?

By Jerry Webman, Ph.D., CFA

Chief Economist

Oppenheimer Funds BLOG

https://www.oppenheimerfunds.com/advisors/article/us-deficit-shrinking-and-debt-stabilizing

Public opinion polls consistently name the federal deficit and resulting debt among the top problems facing the nation. 1 And just a couple of months ago, a nationwide poll showed that 94% of Americans believe the deficit is growing or unchanged. 2 In the aftermath of the Great Recession, these views were understandable as revenue dried up, automatic stabilizers kicked in and the Obama administration pushed a large fiscal stimulus package through Congress. When President Obama was sworn in for his first term, the federal deficit as a percent of GDP had already grown from an average of 2% during the Bush administration, to a monthly run rate of 5.5% by January of 2009, based on monthly U.S. Treasury numbers; it would swell to a peak of 10.4% by the end of December 2009. 3 And higher deficits translated into a growing debt burden. Around the time of the debt ceiling debate in the summer of 2011, the U.S. was on track to accumulate, by the end of 2022, debt in the public hands equal to nearly 90% of total output – a level where, the economists Carmen Reinhart and Kenneth Rogoff had (in)famously told us, growth dies. 4

But a funny thing happened on the way to becoming the next developed country with a debt crisis- the deficit started shrinking rapidly. The Congressional Budget Office (CBO) forecasts that, under current law, the deficit will shrink to 2008 levels – $642 billion or 4% of GDP – by year end and continue to fall until 2016. 5 How did that happen?

For one, while the press bemoaned Washington’s failure to achieve a “Grand Bargain” for the $4 trillion deficit reduction ratings agencies requested – Simpson-Bowles, Super Committee, Gang of ‘insert number here’—believe it or not, Congress – with its mere 15% approval rating 6 – acted.

As my political science professor taught me years ago, American politics doesn’t produce grand bargains, we do things incrementally. And this incrementalism, however unlovely the process, has worked. The Budget Control Act of 2011 (which put caps on discretionary spending), the American Taxpayer Relief Act (which, though poorly named, resulted in $600 billion in new tax revenue), and the sequester (the full effects of which we have yet to see) have had a real impact on the nation’s fiscal situation.

Improving economic conditions have also been helping the deficit equation. Consider revenues. On average, revenues account for 18% of GDP, but at the end of 2012 revenues were only 15.8% of GDP. 3 As the economy improves the government will collect more revenue and, according to congressional budget office projections, revenues will likely return to 18.3% of GDP in 2014. 7 In fact, April tax revenues were $100 billion higher than they were for the same month a year ago. 8The near-term fiscal problem is on the mend.

We and our elected officials, however, had better not grow complacent. As I noted in a previous post, the aging U.S. population is poised to add an ever-growing burden to the government and its taxpayers. Today the average Baby Boomer is 55 years old. 9 And, in 10 years, when she turns 65, the nation’s debt-to-GDP will likely resemble a hockey stick if current on entitlement policy is unchanged. As a country, to prevent an ever greater share of the nation’s yearly output from funding Social Security and Medicare benefits, to the neglect of defense, education, and infrastructure investment, we will have to make very difficult decisions in determining who receives what benefits, when they receive them, and at what cost to the recipient.

For now, however, policymakers’ actions and the improving economy have bought us time. We have gotten close to the target of $4 trillion in deficit reduction. And, per the CBO, we have stabilized debt-to-GDP around a level of 70% for the foreseeable future. 5 Not bad for a country once considered doomed by its debt.

Digging out from under the pile of unfinished business Speaker Boehner and his cronies left behind when the House went on vacation again!