I finally felt the need to write a PPR-style response to this DP opinion piece, because…well, it’s just so inaccurate. Let’s dive right in.
The Woes of Debt-to-GDP Ratios
First, debt-to-GDP ratios. These are all the rage nowadays because Reinhart-Rogoff supposedly proved that countries that pass the 90% mark have reached some dire point-of-no-return. That’s not entirely true. Yale’s Robert Shiller points out why in this Project Syndicate piece. To start, GDP is measured on a yearly basis, while the U.S. Treasury pays off its debts over a much longer-term. The Treasury issues bills, notes, and bonds, some of which reach maturity within weeks, others within decades. The point here is that GDP is measured on quarterly and annual bases while gross debt is not bounded by time. Thus, the units of the debt-to-GDP ratio are actually time. It makes a great deal of difference whether that unit is a year (the current custom) or a decade, and the choice is essentially arbitrary.
This number has only become meaningful because of politicos’ and wonks’ obsession with Reinhart-Rogoff. But it’s worth pointing out the limitations of their study. The 90% threshold is not some physical limit. Reinhart-Rogoff estimated it based on an observational study of past societies and debt-fueled social doom has numerous contingencies beyond the magic value. Further, as Schiller notes, Reinhart and Rogoff only came up with this value by arbitrarily setting grouping intervals for each society as follows: <30%, 30-60%, 60-90%, and >90%. It actually “turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases.”
So, back to the contingencies, debt presumably is bad because it increases a government’s cost of borrowing, driving up spending, and pushing debt to astronomical levels. There is no real logic as to when this spiral of doom sets in. Shiller notes, “a lot of what happens in the markets is driven by pure stupidity.” The bond vigilantes don’t just magically swoop down once societies reach the 90% threshold. Even as U.S. debt levels have increased, real yields on short-term treasuries have gone down (and have even been negative). Greece, at 160%, suffered a severe debt crisis. Japan, at 220%, and Singapore, at 106%, have not. Buyers look at much more than debt-to-GDP ratios when making these decisions and many more factors figure into whether or not a society will experience a debt crisis than this simple metric.
Spice Things Up with an Outrageous and False Debt Claim
According to Liveris, when our debt reaches 100% of GDP, the federal government will spend 100% of its revenues on interest on the national debt. While I’d like to see Liveris’s calculations, this seems impossible without a number of outrageous assumptions. Nominal GDP for 2012 was $15.7 trillion, revenues for 2011 (the most recent year for which data are available) were $2.3 trillion, and interest payments on the national debt amounted to $360 billion. In other words, interest on the national debt, at a debt-to-GDP ratio of 0.73, was just 15% of revenues.
True, the amount of our interest payments will increase over time but not to 100% of all revenues. The CBO predicts that the debt-to-GDP ratio will stabilize over the next decade. The deficit is shrinking at a fairly rapid pace. Further, real yields on short-term treasuries are actually negative and even recent crises, like the debt ceiling debacle, have done nothing to change that. So, while interest payments on the national debt will certainly increase, asserting that they will amount to 100% of federal revenues (even at a debt-to-GDP ratio of 1) is preposterous and impossible without a number of barely-tenable assumptions.
When in Doubt, Quote Obscure Scottish Historians
In a fantastic example of question-begging, Liveris ties this debt-to-GDP ratio to the so-called Tytler Cycle. Set aside that the quote, while attributed to Tytler, doesn’t appear to be in any of his known works, and Liveris’s argument is still shoddy. This is a non-scientific, categorical claim made about one society that died thousands of years before Tytler “invented” his obscure cycle and thousands of years before our own crises. Athens was an entirely different society with an entirely different system of government and global context. Much as we like to call both ancient Athens and the U.S. democracies, James Madison was careful to always call the U.S. a republic, reacting perhaps to Aristotle’s characterization of democracy as “mob rule.” Nonetheless, we should proceed carefully when making these comparisons. We should also be careful when we invent supposedly natural cycles based on the historical experience of just one society. A single instance does not create a socio-physical law of some sort, and, as Nassim Taleb reminds us in The Black Swan, history only ever turns out one way — there are never alternate realities with which we can compare the ultimate outcome. Tytler’s cycle is not some sort of traction beam that democracies are locked into, short some dire measure to escape. It was a non-rigorous, categorical, general claim based upon one long-dead Scottish man’s reading of history. Liveris’s column, of course, would not have been as exciting had he be unable to appeal to some legitimate-sounding authority to prove that we must listen to him or face doom.
Invoke Bowles-Simpson but Don’t Get Bogged Down in Facts or Details
No sermon on the debt is complete, however, without a reference to Bowles-Simpson. Bowles-Simpson was, for a time, the only serious proposal to reduce the federal government’s debt and deficits. There are numerous other plans out there now, but perhaps because of primacy or because none had the legitimacy of a presidential commission, Bowles-Simpson has stuck. Now, it is mostly a term each party brings up to accuse the other of being unreasonable or of not caring about the debt/deficits.
Liveris characterizes Bowles-Simpson as a $4 trillion deal, including $3 trillion in entitlement cuts for $1 trillion in new revenues. This is not entirely correct. Bowles-Simpson assumed the expiration of the Bush tax cuts for high-earners, amounting to $1.1 trillion in new revenue. It adds $1 trillion in revenues on top of that. Many of the tax increases to date have just gotten us to the Bowles-Simpson plan’s baseline, not its savings. Liveris is also wrong in saying that the $3 trillion in spending cuts all hit entitlements. They also hit discretionary spending, including defense spending.
The Center for Budget and Policy Priorities has a nice analysis and summary of the plan. Among other things, the CBPP extends the plan to a ten-year (not eight-year) window to make it comparable to other debt/deficit reduction programs (it’s actually $6 trillion in debt reduction once you do do that). Additionally, the CBPP also counts the expiration of the Bush tax cuts for high-earners as a tax increase, making the spending cuts: tax hikes ratio about 1-to-1 (not, as Liveris claims, 3-to-1).
Additionally, in his praise of Bowles-Simpson, Liveris entirely ignores specifics. Bowles-Simpson isn’t necessarily the best plan — it’s just that, for a while, it was the only plan. Before trotting out Bowles-Simpson, it’s important to consider how it cuts spending and entitlements, and how it raises revenue. Do you support a gas-tax hike? Do you want to reduce defense spending? Do you want to increase out-of-pocket healthcare costs for middle-class retirees? In other words, talking about deficit-reduction plans solely in terms of ratios and dollar amounts is nonsensical. They involve actual policies and they concentrate cuts and tax hikes differently.
East Asia: A Model for the Modern GOP?
Among Liveris’s oddest claims is this doozy:
The Republicans want to lower the cost of government and stimulate the economy by reducing entitlements and lowering taxes. The best examples of this phenomenon are today’s Singapore, or other East Asian economies.
Granted, Singapore has low taxes, but as The Heritage Foundation notes, ”Structural budget surpluses have sustained high debt levels near 100 percent of GDP. The state remains heavily involved in the economy through government-linked companies.” Other than perhaps Singapore, it’s difficult to see much basis in East Asia for this rather bizarre claim. Are we to believe that Republicans are emulating supposedly laissez-faire East Asian governments? Or that these governments are dealing with issues similar in size and substance to those of the U.S.? How many of these countries have entitlements comparable to Medicare and Social Security, and in how many does the quality of life compare to that in the U.S.?
What was Supposed to be a Brief Conclusion
People don’t like debt, they don’t like spending more than they earn, and they don’t like it when their country does the same thing — and rightly so. Let me be clear: high deficits and debt are unsustainable in the long-term. But our current deficits and debt are not dire. The constant political crises we face are not debt crises, but manufactured stand-offs that the U.S. Congress, in its infinite wisdom, has created. The debt ceiling debate and fiscal cliff were political crises that would have created economic crises, but they were not fundamentally economic crises.
Liveris is being disingenuous when he says we are nearing some inescapable event horizon. We need to reduce our deficit and debts in the long-run, and we especially need to contain government healthcare spending on seniors. But we are not locked into a spiral of decay, nor are we experiencing a debt crisis. The U.S. government’s borrowing costs have been plummeting and our economic recovery, though slower than we’d like it, is chugging along. The U.S. is still a promising and stable market for investment. Moreover, Congress has made significant efforts toward deficit reduction, achieving about half of Bowles-Simpson’s spending cuts and arriving at least at its revenue baseline. The deficit is on track to shrink faster than at any time since demobilization from WWII.
This means that we still have time to sort out our differences and to carefully think about how we’d like to reduce our deficits over the long-run. I’m not trying to downplay the seriousness of our debt, only to offer some caveats to those stricken with anxiety every time they go to usdebtclock.org. The danger we face in over-hyping the debt is making dumb, painful cuts (i.e., the sequester) and potentially launching the U.S. back into recession. Economic recovery and deficit reduction can easily become opposing goals, and fear-mongering only makes that more likely. This happened, for instance, in the final quarter of last year when government spending cuts caused U.S. GDP to shrink. And it would likely happen again should the sequester enter into force.
Undoubtedly, we need to make commitments to reduce our debt and deficit in the long-run. But we are not witnessing “the fall of the American empire” nor are we “voting for, endorsing or pacifistically (sic) allowing unsustainable growth in debt.” U.S. citizens are not complacent fat-cats, greedily raiding the Treasury, and we are not locked into the so-called Tytler cycle, doomed to decline — as all democracies supposedly are.
Liveris’s sermon closes with a rally to common sense, an assertion that his careful reading of someone else’s careful reading of still others’ careful readings of ancient history has shown him must be true. In fact, Liveris omits and manipulates facts to suit his argument, inciting a sense of panic on the basis of misrepresentations and shoddy reasoning. In looking back to ancient history, he misses much of what is happening right now and lets himself believe that he knows something that the rest of us don’t.
Photo credit: cmsmyth.com