The consequences of Obama’s debt

By Michael J. Boskin
November 2, 2012

This essay was submitted through the Romney campaign as a response to Lawrence Summers’ most recent column, “This election, Obama is the wiser economic choice.”

The large budget deficits and expansion of the national debt under President Barack Obama, unprecedented since World War II, have him set to bequeath an immensely costly legacy. Each of his deficits as a percentage of gross domestic product has been larger than the previous post-World War II record, for which Democrats excoriated President Ronald Reagan. Between the debt already racked up and what Obama’s FY13 budget projects, each income-tax-paying family will owe more in Obama debt than a new mortgage on a median-priced home and four years of college costs.

Yet more than three years into recovery from the recession, the president has not proposed a program to deal with the massive debt. Indeed, he abandoned even the long-run goal of a balanced budget, adopting the much weaker goal of stabilizing the debt-GDP ratio at the higher projected FY2016 level. But he did not budget for it, appointed the Simpson-Bowles Commission to propose how to do so, then ignored its recommendations. He has no serious proposals to deal with the even larger eventual long-run deficits in Social Security and Medicare, which total several times the current national debt. When Treasury Secretary Timothy Geithner was asked by Congress what the administration’s plan was, he said, “We don’t have one.” Vice President Joe Biden guaranteed, “No changes to Social Security.”

The government has been borrowing to cover 30 percent to 40 percent of its budget, hiding the true tax cost of government spending from voters. The $5.5 trillion in debt already accumulated in Obama’s first four years implies a future $5.5 trillion tax hike (in present discounted value). The projected future deficits and debt likewise add up to another immense tax hike, with marginal tax rates eventually reaching 70 percent for many middle-income families. That’s because every dollar borrowed requires future interest be paid; so unless future spending is cut, future taxes must go up to cover the interest.

The prospect and then reality of higher tax rates, plus increased uncertainty about fiscal policy, slow growth and raise the specters of higher inflation eroding the value of the government debt and even a financial crisis. Higher debt above a modest level slows growth because it eventually crowds out investment, and the lower capital formation reduces future incomes. How serious are these negative consequences of Obama’s debt buildup likely to be?

Obama’s Office of Management and Budget provides long-run deficit and debt estimates based on the administration policies, as implemented and proposed, continuing. These include his tax increases, health policy and, importantly, the absence of Social Security and Medicare reform. Combining these estimates into a realistic projection ‑ but with more optimistic growth and healthcare cost containment assumptions than those in the Congressional Budget Office Alternative Fiscal Scenario ‑ drives the (publicly held) debt-GDP ratio, currently 73 percent, over 90 percent next decade, 100 percent immediately thereafter and over 200 percent of GDP around 2050. For comparison, that is well beyond Greece today. Many economists believe the high debt burdens harm the economy considerably more when debt gets above 90 percent or so of GDP. At the end of 2008, it was 40 percent.

The International Monetary Fund estimates the harmful effects of debt on growth at  just under 0.2 percent per year for each 10-percentage-point increase in the debt-GDP ratio. The president’s policies, if continued, would bring growth to a halt by 2050, at a level of GDP 30 percent lower than if his debt-explosion policies had not been continued. That’s most of a generation of per capita income gains wiped out, or, put another way, it is as large as the gap between American and lower Western European per capita incomes. Left unchecked, the average projected annual per family hit would be about 30 percent of income by the time today’s kids are in the midst of their careers. Even if the effect of debt on growth is just half that estimated by the IMF, the Obama[r9]  debt accumulation has severe negative consequences for future living standards.

The debt increase under President Obama, plus the administration’s own projections of debt based on his policies continuing, should concern everyone, rich, poor or middle-income, urban or rural, young or old, Republican or Democrat. Failing to rapidly begin bending the long-run debt-GDP curve down risks a growth disaster, a lost generation of growth whose severity would be much worse even than the recent deep recession and tragically anemic recovery.

Fortunately, if Obama’s policies (including the absence of Social Security and Medicare reform) are reversed by his successors and the debt-GDP ratio lowered, the harmful effects will be attenuated. While substantial long-run damage would already have occurred, the economic “gain” from the political “pain” of controlling the budget is enormous. Mitt Romney and Paul Ryan offer a clear alternative of balanced budgets and debt reduction. The choice of fiscal and economic future could not be clearer.

PHOTO: Copies of U.S. President Barack Obama’s Fiscal Year 2013 budget are seen stacked inside the House Budget Committee room on Capitol Hill in Washington February 13, 2012. REUTERS/Larry Downing


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Mad, utterly mad.

Posted by Biscayne | Report as abusive

2000-2008: two wars NOT funded by taxes or bond drives, but started at the same time new tex cuts are established (a bread and circus approach?); go-it-almost-alone in Iraq hurts U.S. business overseas on top of the war costs to the federal economy. Medicare part D may be the largest non-competitive government health program enacted, why no price competition or volume discounts like VA programs? Finally, 1/2 Trillion for TARP and the auto bailout. Then Pres. Bush (43) steps down.

2009-2011: stimulus about 1/2 Trillion including tax cuts; over this time Obama cuts deficits 1.7 Trillion to 1 Trillion in a steep downward trend. Continued tax cuts contribute to annual deficits, even so, they shrink each year under Obama.

Romney-Ryan-Norquist-Rand plan is to ignore son-of-Simpson/Bowles ‘sequester’ and spend $2 Trillion on defense (more of the same ships for new opponents’ high tech and low tech weapons to target, not research into new and better weapons and defenses — Lindbergh correctly advised the latter in the late 1930′s and early 1940′s), and give away Trillions more in tax cuts for millionaires and ending estate taxes on multi-million lottery-sized inheritances. It’s a Bain like move to cash out now, but we’re not talking about a struggling company we’re talking about our whole country.

Yes debt is bad, but it’s a lot less bad at zero percent financing, as Suzi Orman might say. Debt at such low interest is not the priority, and can take 2nd place after recovery and jobs stimulus. We need to grow the economy and reduce deficits in parallel, not repeat the 200-2008 policies by adding more tax breaks for Romney’s peer group while shortchanging government-funded research, education and infrastructure.

The GOP plan is cutting off long term investments with big payoffs to instead cash out for short term gain. That’s worse that slowly but surely tackling the deficit as Obama is doing during the recovery.

Posted by Decatur | Report as abusive

@Decatur: Interesting comment, although your figures don’t agree with those available from independent sources: displayafact.cfm?Docid=200
I’d also like to learn more about what you mean by “zero percent financing”. Not all of the federal government’s debts are based on paperwork being rolled over by the Federal Reserve at zero percent (I’m not entirely familiar with how this system works though, so I might have missed something). Some of the US federal debt is external debt (held by foreign central banks such as in China), and that certainly isn’t rolling over indefinitely at zero percent interest.


A lot of these discussions are missing another vital point: a mere DISCUSSION about the debts/deficits in which significant numbers of otherwise sensible Americans subscribe to the theory that debts/deficits don’t appear to matter (along the lines of, “let’s ignore the gas leak because we haven’t had an explosion yet”); can in itself damage investors confidence in the USA! This happens because they can get the impression American voters aren’t serious about electing public officials who will control & repay the deficits (the risk of debt default can substantially increase in these conditions). You’ve got to start taking this seriously, or else your interest rates might start getting hiked, and the debt amortization might start looking a LOT uglier VERY FAST as it has done in Europe…

Posted by matthewslyman | Report as abusive

Dr. for sale.

Posted by brotherkenny4 | Report as abusive

Paraphrasing Adam Smith, a public debt this large will never be repaid. It will either be inflated away or defaulted upon. The coercive Utopianism of jackboots will prevail. And all of the venal Solons responsible for the decades-long creation of this tyrannical mess will never be brought to justice, but will have buildings, highways, and dams constructed in their honor. RIP fidelity, rule of law, and the democratic process.

Posted by StevePhillips | Report as abusive

There is a big difference between saying that deficits do not matter (Cheney’s words under Reagan, NOT my words or my opinion) and arguing that forcing the economy to collapse (or undermining the opposition president?) by slashing public sector jobs in a recession is more important than helping stimulate a recovery (a tried-and-true method used by past Presidents who are now RINOs).

The revenue to fix the deficit will increase as the economy grows, unless we try the ‘starve the beast’ Norquist approach of cutting off the public side of a combined private and public economy where both aspects work in synergy, not in competition as the tea party would have us believe.

You seem to belong to the debt matters above all school, so – what were you saying about deficits under Reagan and Bush 43, adding debt for unfunded wars or arms race, then piling on structural, recurring deficits from high-bracket tax cuts as insult to injury?

The cost of borrowing IS a factor in debt. The GOP refusal to compromise in 2010 lost us AAA rating and has potential to make existing debt structure more expensive – at no gain whatsoever (our rates go up so we have more total debt/deficit, rather than adding debt by borrowing for more highways at same low rate as a stimulus that has some actual benefit). The risk now is failing to use all tools – the cuts we’ve made for 3 years now, plus sitmulus, plus tax revenue – just like Eisenhower used all those tools, but he’s now a RINO.

Debt reduction is needed in the long term (say 2-10 years, and that’s why decade long planning was under discussion with the last debt deal (cutting 3.4 Trillion) offered by Obama & democrats. In the short term of months to say 2 years, we need jobs stimulus and in the longer term we’re less competitive if we don’t invest in science education and infrastructure. A balance is needed, and what’s missing from the balance is raising the revenue side of the picture, which is the leg of the stool that Romney-Ryan want to cut even further.

The greatest uncertainty that jepardizes our credit is the ongoing GOP brinksmanship like 2010 loss of AAA. The tea party is willing to cost us billions or trillions more at the next fiscal cliff instead of making any compromise. I hope we don’t see what a Pyrrhic victory for them looks like for the rest of us.

The GOP plan is a starvation diet for the middle class US economy, with extra dessert for the ‘job creators’ who must be ready to create some jobs anytime now, after about 30 years of tax breaks with little to show in return.

The approach that works better than the tea party starvation diet, where the rich save us from dessert by taking it all, is diet and exercise for everyone. It’s working so far and the year to year deficits are shrinking as we recover from the crash of a generation. We are looking a lot better than the new GOP bogeyman of Europe that you bring up. Only Canada may be recovering better than the US.

Posted by Decatur | Report as abusive

One key point is that when Greece, Spain, Ireland, et el. go in the tank, the EU bails them out. When we do, no one can or will.

Posted by ErnieLane | Report as abusive