President Barack Obama’s 2012 budget plan is dead on arrival — and rightfully so, it turns out. U.S. fiscal scorekeepers calculate it taking federal debt levels into dangerous territory. Meanwhile, both parties in Congress are showing tentative new signs of embracing fiscal responsibility. But without some leadership from the White House, nothing will get done.
The headline number from the Congressional Budget Office finds the White House budget adding $9.5 trillion to the U.S. national debt over the next decade against the administration’s estimate of $7.2 trillion. The two rarely agree, but the gap this time is particularly large. And both sets of predictions remain uncomfortably dependent on low and stable interest rates.
That’s a questionable assumption:
1) The CBO’s take suggests bond markets have reason to grow queasy about rising U.S. borrowing. Public debt as a share of the economy would hit 87 percent by 2021 — uncomfortably close to the 90 percent level economists Carmen Reinhart and Kenneth Rogoff have found crimps economic growth. And slower growth makes it harder to pay down debt. Recall that Obama had been promoting his budget as stabilizing the debt-GDP ratio at around 77 percent.
2) The CBO also determined interest payments would absorb 18 percent of federal revenue in 2018. Moody’s Investors Service has previously identified such a threshold as triggering downward pressure on Uncle Sam’s credit rating. U.S. debt service hasn’t been so high since 1980. Then, though, interest rates were high, and when they declined servicing the debt became more affordable. This time, rates are already low and it’s the sheer quantity of debt that’s the problem.
3) Even a slight rise in rates above White House forecasts — say, a single percentage point — would add $1.3 trillion to the 10-year debt number. And as the great folks at e21 point out
In the Administration’s baseline estimate, the public debt will rise from 62.2% of GDP in 2010 ($9 trillion) to 77% of GDP in 2021 ($18.9 trillion). … Over this period, the effective interest rate implied by the ratio of net interest expense to public debt is 3.5%. (This happens to be the average for the 5-year constant maturity Treasury rate over the past 10 years.)
However, the average 5-year borrowing cost for the 10 years ending in January 2000 was 6.3%, while the average 5-year borrowing cost for the 10 years ending in 1990 was 10.4%. If the average effective interest rate on the debt were to climb to the 10.4% average of the 10 years ending in January 1990, the public debt would explode to nearly 150% of GDP by 2021. Under the more modest 6.3% assumption of the 1990s, the debt ratio would exceed 100% of GDP by the end of the decade. Rather than doubling, as assumed by OMB, the public debt would quadruple over ten years to more than $36 trillion.
Obama’s budget anyway didn’t begin to address long-term healthcare and Social Security spending commitments. The word is that his political advisers think he should stall. A bit better news from Capitol Hill, though. Bipartisan support seems to be growing for the deficit reduction measures proposed late last year by Obama’s debt commission. And more Republicans, including the ranking member of the Senate Budget Committee, are sounding willing to consider higher taxes in exchange for deep spending cuts.
But history suggests no major fiscal fixes will become law without presidential involvement. The White House was a full partner in restoring Social Security’s solvency in the 1980s and balancing the budget in the 1990s. No wonder 64 senators, 32 from each party, just sent Obama a letter urging he “engage” on the budget.
Obama should learn from his recent involvement with the U.N. Security Council and Libya. Nothing gets done there or in Congress without presidential leadership. Of course, maybe the U.S. can wait until after the next election before taking action on its debt woes. Bu that, like Obama’s budget, is a terribly risky proposition.