The Congressional Budget Office today released a new
report on the risk of a fiscal crisis occuring in the United
States due to our long-term debt, and its conclusions largely
echo points that I’ve been trying to make repeatedly.
The bottom line is that the longer we prolong dealing with our
debt problem, the greater the risk of a fiscal crisis, and the
more unattractive the options become for digging ourself out of
the mess.
Some of the report undermines arguments that conservatives are
trying to advance — the CBO says, for instance, that largely
extending the Bush tax cuts will significantly add to the
deficit. But broadly speaking, the report presents a reality that
is quite constistent with arguments conservatives have been
trying to advance for years.
It outlines several consequences for growing debt, including
crowding out of private investment and the need for higher taxes
and/or spending cuts. Of higher taxes, however, it warns that,
“To the extent that additional tax revenues were generated by
increasing marginal tax rates, those rates would discourage work
and saving, further reducing output and incomes.”
The CBO also makes another point — one which I constantly
emphasize to conservative friends who say they’re mainly
interested in national security — that a failure to address our
fiscal situation will undercut military readiness.
“Having a small amount of debt outstanding gives policymakers the
ability to borrow to address significant unexpected events such
as recessions, financial crises, and wars,” the CBO writes. “A
large amount of debt could also harm national security by
constraining military spending in times of crisis or limiting the
ability to prepare for a crisis.” It also notes that, “increased
dependence on foreign investors that would accompany a rising
debt could weaken the United States’ international leadership.”
While the CBO notes that it’s hard to predict with any degree of
accuracy when or if the U.S. would encounter a fiscal crisis, it
says that, “all else being equal, the higher the debt, the
greater the risk of such a crisis.”
Once a fiscal crisis actually occurs, the options get even worse.
They include restructuring debt or causing inflation, both of
which would run the risk of raising interest rates for government
to brorrow money. Inflation would not only have negative economic
consequences, but it would also increase future deficits. As an
example: “if inflation was 1 percentage point higher over the
next decade than the rate CBO has projected, budget deficits
during those years would be roughly $700 billion larger.”
The response to the fiscal crisis, the CBO anticipates, would
likely include an austerity program with a mixture of tax
increases and spending cuts. Yet those emergency measures will
have to involve much more severe actions than what would be
required if we were to address our debt problems now.
