The consequences of Obama’s debt
The consequences of Obama’s debt
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.
EU could compensate firms hit by US sanctions over Iran — French minister
- In 1996, when the United States tried to penalize foreign companies trading with Cuba, the EU forced Washington to back down by threatening retaliatory sanctions
PARIS: France is looking to see if the European Union could compensate European companies that might be facing sanctions by the United States for doing business with Iran, said French finance minister Bruno Le Maire on Sunday.
Le Maire referred to EU rules going back to 1996 which he said could allow the EU to intervene in this manner to protect European companies against any US sanctions, adding that France wanted the EU to toughen its stance in this area.
In 1996, when the United States tried to penalize foreign companies trading with Cuba, the EU forced Washington to back down by threatening retaliatory sanctions.
European firms doing business in Iran face sanctions from the United States after President Donald Trump withdrew from a 2015 nuclear deal with Iran.
“Are we going to allow the United States to be the economic policeman of the world? The answer is no,” Le Maire told C News TV and Europe 1 radio on Sunday.
Le Maire added it was important Italy kept its EU budget commitments, in light of plans by Italy’s new coalition government to ramp up spending — which could put Rome at odds with the EU.