May 9, 1997
"Knocking Down the Federal Debt"
San Jose Mercury News
By Timothy Taylor
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THE FIRST STEP toward controlling the federal budget deficit is to stop the
problem from worsening. That step has now been taken.
I do not place much trust in the plan that President Clinton and the Republican
Congress agreed on last week for balancing the budget by 2002. After all, the
success of that specific plan will depend on many tough votes to be taken over
the next five years, and on the continued good behavior of the economy.
What matters for the growth prospects of the economy as a whole is not that
the budget is balanced in any single year, but that the burden of the federal
debt should stop growing.
The best quick way of assessing the federal debt, which adjusts for both inflation
and the size of the economy, is to check the ratio of the debt to the gross domestic
This year, for example, the accumulated federal debt -- that is, the sum of
past annual deficits -- will reach $3.8 trillion. The size of the economy as measured
by GDP is $7.8 trillion. Thus, the debt/GDP ratio is 49 percent. When Ronald Reagan
took office in 1981, the debt/GDP ratio was 25.8 percent, which was within a few
percentage points of its post-World War II low. By 1994, years of outsized deficits
had raised the debt/GDP ratio to 50.2 percent.
Since then, the ratio has leveled off. If the plan for balancing the budget
by 2002 holds, the ratio of federal debt to GDP will drop to about 44 percent
What I find comforting is not the specifics of the just-announced budget deal,
but the overall pattern of projected budgets in the next five years. In very round
numbers, the sum of government deficits for the five years from 1998 to 2002 is
projected at $300 billion. Even if the accumulated federal debt over that time
hits $900 billion -- triple what is predicted -- the debt/GDP ratio would still
be around 50 percent in 2002. In fact, a variety of projections from the non-partisan
Congressional Budget Office (CBO) generally find that the debt/GDP ratio will
remain around 50 percent until 2010.
This leveling out of the government debt burden has been a long time in coming.
The key ingredients behind this good news include George Bush's much-maligned
deficit reduction plan of 1990 and Clinton's equally maligned deficit reduction
plan of 1993. The lengthy economic recovery of the last six years has played an
indispensable role by keeping tax revenues high and dampening the need for social
Finally, more than a decade of restraint in federal spending has helped hold
deficits down. In 1983, federal outlays were 23.6 percent of GDP. In 1997, outlays
will be only 20.8 percent of GDP. Lest this decline of a few percentage points
sound small, remember that in a $7.8 trillion economy, every 1 percent of GDP
is $78 billion!
With the debt burden under control, it is time to shift some focus away from
the year-to-year budget battles, and toward the long term. From 2010 to 2025,
the taxpaying labor force will nearly stop growing; the baby boom generation will
start retiring en masse; Medicare and Social Security spending will rise dramatically;
and the federal debt burden will rise with it.
In a March report, CBO estimated a number of debt scenarios, assuming different
levels of restraint in spending and various levels of feedback effects from the
deficits to the growth rate of the economy.
The relatively optimistic estimates are that by 2025, the ratio of debt/ GDP
will hit a startling and uncomfortable 80 percent. The pessimistic estimates are
that by 2025, the debt/GDP ratio could hit 110 percent, which would be roughly
the level of debt the nation had incurred in 1946, after borrowing to fight World
Frankly, I don't believe these projections will actually come to pass. Well
before the debt/GDP ratio hits 100 percent, something will crack.
The question is whether we take the small and moderate steps now which, over
the next 15 years, will prevent a collision between Social Security, Medicare,
and government debt. Or alternatively, whether we spend the next decade squabbling
over the comparatively small details of the annual budget, and let those worthwhile
and popular programs head for a smash in the second decade of the 21st century.
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