Why skyrocketing federal debt will mean the next recession is harder to overcome

Why skyrocketing federal debt will mean the next recession is harder to overcome


JUDY WOODRUFF: Even as the president is weighing
what he would try doing if the U.S. economy slows down, there are stunning new figures
about how the federal deficit is growing worse than projected. The news came yesterday from the nonpartisan
Congressional Budget Office. In fact, as a share of the total economy,
the deficit is now reaching its highest levels since the end of World War II. Lisa Desjardins takes a closer look at what
is behind the jump and how the debt could limit some of the choices in the event of
a future downturn. LISA DESJARDINS: That’s right, Judy. The deficit is now expected to close in on
$1 trillion this year, and then stay over $1 trillion for every year on the horizon. All told, the CBO says, due to recent changes
in policy and the economy, deficits over the next decade will be $800 billion higher than
it projected just a few months ago. Those changes include a trio of debt-pushers. The bipartisan budget deal is raising spending,
the Republican tax cuts are lowering revenue, and the economy overall is slowing down. Let’s break this down with Maya MacGuineas
of the Committee for a Responsible Federal Budget. Maya, thank you for joining us. I want to depict to people the long-term issue
here. Let’s look at what the deficits are projected
to be now for the next few years. Look at that, $1 trillion, $1 trillion, $1
trillion, as far as the eye can see, $1 trillion-and-above deficits. And let’s look at how this relates to GDP
and the curve historically. You can see that high peak there is World
War II. And we now see that we are on a path to near
those levels that we were hitting in World War II. I think biggest question to you, Maya, you
have said and CBO has said this level of debt is unsustainable. But what does that really mean to the average
American? What will happen if we do keep on this trajectory? MAYA MACGUINEAS, President, Committee for
a Responsible Federal Budget: Yes. And the trajectory is a stunning one, as your
chart shows, because the fact that we are at the debt levels that are highest they have
ever been relative to the economy, other than just after World War II, without having fought
in a war, a world war, sort of shows you that this is a very different situation. This is self-imposed by a lot of policy choices. The reason this matters to American families
is a number of issues. First, it can have negative effects on the
economy. It slows economic growth at a very time when
we should be thinking about how are we going to grow the economy, both immediately, but
also in the long-term, because we have a lot of challenges based on aging. Secondly, it affects your overall budget. If you’re spending money on interest payments,
you’re not spending that on important public policies. And we do have interest payments that, despite
very low rates, because we have so much debt, are going to keep growing as a size of the
budget. I think really on people’s minds right now,
though, is the fact that if and when you have a recession, you want to use borrowing to
fight that recession. That’s what fiscal stimulus is. And yet, when we enter the next recession,
our debt relative to the economy will be twice as high as when the recession of 2008 hit. That means both monetary policy and fiscal
policy, those toolboxes are somewhat depleted, which means fighting the next recession will
be much more challenging. LISA DESJARDINS: You know, CBO, sometimes,
I think of them as our fiscal referee. And they looked at some of the headline policies
that we have been talking about lately, including the Republican tax cut. And, briefly, they didn’t change their forecasts
that they don’t believe those tax cuts will pay for themselves. But they also found that, last year, corporate
tax revenues were actually lower than they expected. Now, they said it’s too soon to conclude if
that is directly related to the tax cuts or not. But, overall, Maya, how big of a deal do you
think those tax cuts are in terms of the budget and economy in the future? MAYA MACGUINEAS: It’s a huge deal, Lisa, for
a number of reasons. First, when we did tax reform, which was absolutely
necessary, we should have done it in a way that did not add to the debt, either by getting
rid of a lot of tax breaks, raising other revenue, cutting spending, but we should have
done revenue-neutral tax reform. The fact that we didn’t means it will have
less of a positive effect on the economy. I think we’re already seeing that. It also kind of poisoned the political waters. And it makes it more difficult for us to move
forward on doing what we need to do to actually fix the debt. But people who were saying at the time, oh,
these tax cuts will tell from — well, these taxes will pay for themselves, that was always
a fairy tale. It is still a fairy tale. And you add to that these spending increases. This is an era of just charging everything
on the credit card, and it is going to make the economic challenges of the future ever
so much more difficult. LISA DESJARDINS: Another policy that CBO looked
at is trade policy and current tariffs. And they found also interesting things there. Among their findings, they found that the
tariffs would have — impact the economy, bring down GDP slightly, about 0.3 percent,
but also have a bigger impact on imports. Biggest industries affected would be agriculture
and farming. So not too many surprising — surprises there. But, Maya, my bigger question overall is,
this seems like an issue like climate change, where we know it looks like there is a large
problem ahead. It could be avoided if we take action now. Why is it that lawmakers in Washington are
not having a serious debate about what to do over our fiscal health? MAYA MACGUINEAS: I do think that is the perfect
thing to liken it to. It’s an issue where there’s no action-forcing
moment. People are doing their best — some people
are doing their best, I should say, to pretend that it’s not really a problem. And you’re hearing that more and more, don’t
worry about the deficit, interest rates are low, we should borrow so much. This, of course, is a very dangerous path
to be taken on. But I think it boils down in many ways right
now to, nobody is willing to make hard policy choices. And fixing the federal deficit requires increases
in revenues and controlling spending. There’s no way around it. But in this highly partisan time, where the
parties are fighting against each other, they would rather give things away than kind of
level with the American people about what we need to do to budget responsibly. And this bodes so poorly for the future, both
if and when we’re hit by a recession, but longer-term issues, everything from the changes
in technology and the work force, the need to update our social contract, aging of the
population. These are the issues we should be talking
about in the budget. But, instead, I feel like we have got a competition
of kind of false promises and giveaways between our politicians these days. LISA DESJARDINS: We will keep looking at this. Obviously, this will affect many generations. Maya MacGuineas from the Committee for a Responsible
Federal Budget, thank you. MAYA MACGUINEAS: Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *