The consequences of Obama’s debt



Michael J. Boskin

Published — Sunday 4 November 2012

Last update 4 November 2012 6:08 am

| نسخة PDF Print News | A A

The large budget deficits and expansion of the national debt under US President Barack Obama, unprecedented since World War II, have him set to bequeath an immensely costly legacy.
Each of his deficits as a percentage of gross domestic product has been larger than the previous post-World War II record, for which Democrats excoriated President Ronald Reagan. Between the debt already racked up and what Obama’s FY13 budget projects, each income-tax-paying family will owe more in Obama debt than a new mortgage on a median-priced home and four years of college costs.
Yet more than three years into recovery from the recession, the president has not proposed a program to deal with the massive debt. Indeed, he abandoned even the long-run goal of a balanced budget, adopting the much weaker goal of stabilizing the debt-GDP ratio at the higher projected FY2016 level.
But he did not budget for it, appointed the Simpson-Bowles Commission to propose how to do so, then ignored its recommendations.
He has no serious proposals to deal with the even larger eventual long-run deficits in Social Security and Medicare, which total several times the current national debt.
When Treasury Secretary Timothy Geithner was asked by Congress what the administration’s plan was, he said, “We don’t have one.” Vice President Joe Biden guaranteed, “No changes to Social Security.”
The government has been borrowing to cover 30 percent to 40 percent of its budget, hiding the true tax cost of government spending from voters.
The $ 5.5 trillion in debt already accumulated in Obama’s first four years implies a future $ 5.5 trillion tax hike (in present discounted value). The projected future deficits and debt likewise add up to another immense tax hike, with marginal tax rates eventually reaching 70 percent for many middle-income families.
That’s because every dollar borrowed requires future interest be paid; so unless future spending is cut, future taxes must go up to cover the interest.
The prospect and then reality of higher tax rates, plus increased uncertainty about fiscal policy, slow growth and raise the specters of higher inflation eroding the value of the government debt and even a financial crisis. Higher debt above a modest level slows growth because it eventually crowds out investment, and the lower capital formation reduces future incomes. How serious are these negative consequences of Obama’s debt buildup likely to be?
Obama’s Office of Management and Budget provides long-run deficit and debt estimates based on the administration policies, as implemented and proposed, continuing. These include his tax increases, health policy and, importantly, the absence of Social Security and Medicare reform. Combining these estimates into a realistic projection — but with more optimistic growth and health care cost containment assumptions than those in the Congressional Budget Office Alternative Fiscal Scenario — drives the (publicly held) debt-GDP ratio, currently 73 percent, over 90 percent next decade, 100 percent immediately thereafter and over 200 percent of GDP around 2050. For comparison, that is well beyond Greece today. Many economists believe the high debt burdens harm the economy considerably more when debt gets above 90 percent or so of GDP. At the end of 2008, it was 40 percent.
The International Monetary Fund estimates the harmful effects of debt on growth at just under 0.2 percent per year for each 10-percentage-point increase in the debt-GDP ratio. The president’s policies, if continued, would bring growth to a halt by 2050, at a level of GDP 30 percent lower than if his debt-explosion policies had not been continued. That’s most of a generation of per capita income gains wiped out, or, put another way, it is as large as the gap between American and lower Western European per capita incomes. Left unchecked, the average projected annual per family hit would be about 30 percent of income by the time today’s kids are in the midst of their careers. Even if the effect of debt on growth is just half that estimated by the IMF, the Obama[r9] debt accumulation has severe negative consequences for future living standards.
The debt increase under President Obama, plus the administration’s own projections of debt based on his policies continuing, should concern everyone, rich, poor or middle-income, urban or rural, young or old, Republican or Democrat.
Failing to rapidly begin bending the long-run debt-GDP curve down risks a growth disaster, a lost generation of growth whose severity would be much worse even than the recent deep recession and tragically anemic recovery.
Fortunately, if Obama’s policies (including the absence of Social Security and Medicare reform) are reversed by his successors and the debt-GDP ratio lowered, the harmful effects will be attenuated. While substantial long-run damage would already have occurred, the economic “gain” from the political “pain” of controlling the budget is enormous.
Mitt Romney and Paul Ryan offer a clear alternative of balanced budgets and debt reduction.
The choice of fiscal and economic future could not be clearer.

— Michael J. Boskin is a Reuters columnists but his opinions are his own. Boskin is Tully M. Friedman Professor of Economics and Hoover Institution Senior Fellow, Stanford University. He chaired the President’s Council of Economic Advisers from 1989-92.
He advises Mitt Romney.

What's happening around Saudi Arabia

JEDDAH: The Saudi led-coalition fighting to reinstate Yemen’s exiled government aims first to set it up in Aden and then return it to Sanaa if possible via peace talks with Houthi foes, a coalition spokesman said.But if the Iranian-allied Houthis did...
RIYADH: Nine Omani Umrah pilgrims, on their way back home, were killed and 34 were injured, in a road accident which took place near Khurais, between Riyadh and Al-Ahsa province.According to police, the coach carrying the pilgrims collided with a tra...
JEDDAH: The Kingdom and Namibia have signed a protocol to establish diplomatic relations between them.According to SPA, the protocol was signed on Tuesday by Saudi Arabia’s Permanent Representative at the United Nations Abdullah Al-Mouallimi and his...
JEDDAH: Official reports reveal nationalization levels of medical and health workers in the Kingdom remain low, with Saudi nationals making up only 21.7 percent of physicians, 31.8 percent of nurses, and 67.4 percent of ancillary staff.According to t...
JEDDAH: The Saudi Food and Drugs Authority (SFDA) will begin receiving clearance applications for medicines and medical supplies, including drugs containing narcotic or psychotropic substances, for Haj missions or other government bodies on Saturday....
JEDDAH: Saudi importers of cattle said the Haj season this year will not see an increase in the price of livestock due to the stability of the local market and the available supply.There are also guarantees from exporting countries that required quan...
JEDDAH: At the upcoming elections the national identity card will be the only approved document used for identifying voters of both genders and allowing voters to exercise their electoral right, provided all statutory requirements are met.In a press...
JEDDAH: Education Minister Azzam Al-Dakhil has spoken of a new education policy which emphasizes the importance of harmonizing admission policies in universities with the needs of the labor market.Al-Dakhil made these remarks during a meeting with un...
JEDDAH: Local bottled water consumption during the summer, Umrah and Haj seasons this year will increase by 10 percent.“This translates into an annual growth rate of between 4 percent and 5 percent,” Rashed Bin-Zouma, a water industry expert, was qu...
RIYADH: Four Saudi secondary students including a young woman from the Eastern Province have received prestigious medals at the 47th International Chemistry Olympiad (IChO), which concluded in Azerbaijan last week.The winners of the four bronze medal...
JEDDAH: The UAE’s decision to lift fuel subsidies beginning in August has raised the possibility of other Gulf states following suit.Economists suggest a wide disparity of prices of gasoline in the Gulf countries will lead to more petrol smuggling op...
DAMMAM: The tourism industry in the Kingdom is witnessing great interest by authorities to develop the archaeological areas, promote their support services and create the best environment for tourism products, said businessman Abdul Mohsen Al-Hokair....
JEDDAH: The ongoing World Circus at north Obhur has brought smiles on the faces of orphans, with its show of acrobats featuring 20 performers and clowns.The orphans of Al-Rawdah district charitable organization said they found the circus entertaining...
RIYADH: The Nepalese ambassador to Saudi Arabia, Udayaraj Pandey, thanked the Kingdom on Thursday as he ends his four-year tour of duty in Saudi Arabia.Earlier in the day, he called on Riyadh Gov. Prince Faisal bin Bandar to pay him a courtesy call a...
RIYADH: Movies produced by young and amateur Saudi filmmakers will be shown on Saudi Television starting in the middle of next week.“The films will be shown daily to encourage young Saudi filmmakers,” said Abdulaziz Fahad Al-Eid, senior broadcaster a...

Stay Connected

Facebook