"History is bunk," said Henry Ford, and today's deficit hawks are just as disinclined to use the past for divining the future, at least as far as the national debt is concerned. True, these economists say, the United States has managed chronic indebtedness in the past and, yes, long-term interest rates remain relatively low. But the US economy has never experienced anything such as the demographic time bomb it will confront over the next few decades, when baby boomers retire.
Some economists project that Social Security, Medicare, and Medicaid, together with defense costs and interest on the national debt, will crowd out all other government commitments from the budget within eight years. By 2028, according to some estimates, the Social Security surplus the government uses to finance other programs will swing into deficit. By 2030, without significant changes, Social Security will rise to nearly 6 percent of GDP from 4.2 percent.
"The administration has got itself into a bind," said Robert Bixby, executive director of the Concord Coalition, an Arlington, Va., think tank dedicated to balanced budgets. "Cutting taxes has left it with little revenue even with the new demands of domestic security, plus the boomers, and this looming fiscal challenge. All they can do politically is justify deficits."
Short of tax revenue, the government relies heavily on private-sector investment to fund itself. Some investors are beginning to have second thoughts about the long-term outlook for the US economy, as reflected in part by the weaker dollar. Spooked by growing US debt, hawks say, both foreign and domestic investors are likely to demand a higher premium to offset the risk of an economic crisis, or to put their money in non-US assets.
That means higher interest rates, which will slow economic growth and boost borrowing costs for such things as homes. According to a recent study by the Brookings Institution, slower growth over the next decade will cost the average household $3,000 a year in lost income while a family with a $250,000, 30-year mortgage will pay an additional $2,000 a year in interest.
Robert Rubin, former President Clinton's first Treasury secretary and a leading deficit hawk, told a bipartisan conference at the Brookings Institution that the prospect of long-term deficit spending was "horrendous."
"The markets will demand a sharp increase in interest rates in response to the risk premium," said Rubin, who attributes much of the Clinton era's prosperity to restrained spending levels. "There needs to be a widespread consensus that deficits are a problem."
The hawks are not alone. Earlier this month the International Monetary Fund issued a report that warned America's growing trade deficit and rising foreign debt posed "significant risks" not just for the United States but for the rest of the world.
"It's a long-term problem but it's a serious one," says Richard Kogan, a senior fellow at the Center on Budget and Policy Priorities. "It's like having termites in your basement rather than getting blown away by a tornado overnight."
Stephen J. Glain can be reached at firstname.lastname@example.org.