Abandon ‘the Children’
We need a better argument against the massive federal debt
Feb 11, 2013, Vol. 18, No. 21 • By MEGHAN CLYNE
Politicians are not known for originality. In their public speech, most cling to the security of clichéd stock phrases the way toddlers hold fast to threadbare blankets. Thus Republican presidential candidate Mitt Romney posed before an enormous national debt clock and intoned that the nation’s “debts get passed on to our kids.” Speaker of the House John Boehner addressed the opening session of the 113th Congress by professing: “In our hearts, we know it is wrong to pass on this debt to our kids and grandkids.” On the eve of President Obama’s second inauguration, Senate minority leader Mitch McConnell warned that no problem America faces “is more urgent than the massive federal debt that is hanging over the heads of our children and grandchildren.” Late last month, House majority leader Eric Cantor celebrated a budget bill that will help “mak[e] sure we can begin to reduce the mountain of debt that is facing our children.”
But while “our children” are the favorite—and often the only—reason offered to whip debt now, this rhetorical standard seems stubbornly ineffective. Our debts are still here, still growing, with no solution in sight.
Why does this ubiquitous line fail to spur Americans to demand fiscal reform? In part because it is poorly suited to those who most need convincing: younger Americans. This group was essential to reelecting Barack Obama, who has overseen an expansion in publicly held federal debt greater than all his predecessors combined. Indeed, younger voters preferred Obama to Mitt Romney by a 23-point margin. According to a Pew Research Center analysis of national exit-polling data, younger voters also strongly prefer more expansive government: 59 percent of voters aged 18-29 said “government should do more to solve problems,” compared to 35 percent among the 65-and-older group. And while Pew has found that younger adults are more likely than older Americans to say that providing Social Security and Medicare benefits at current levels will place too great a financial burden on younger generations, even the 18-29 cohort still believes that preserving Social Security and Medicare is more important than reducing deficits, 48 to 41 percent.
Republicans have clearly got some explaining to do. But simply lamenting that a failure to curb spending today will unfairly burden our “children and grandchildren” isn’t likely to cut it. A great many of these younger voters don’t have children, and convincing them to forgo the benefits of government spending now for the sake of someone else’s kids is a hard sell. Some may, for the moment, want to preserve generous Medicare and Social Security benefits for the sake of their own aging parents and grandparents. And many of them may not even want children of their own: Demographic trends suggest that today’s younger Americans are relatively unconcerned about producing children and grandchildren, let alone their fiscal situation. The young women who supported Obama because he forced employers to fund their preferred methods for not having children seem particularly unlikely to be persuaded by calls for generational forward-thinking.
Moreover, because the argument that the debt will bring ruin upon future generations is so overused, Americans may tune out debt warnings completely. Some version of the line has been around forever: In his farewell address, George Washington urged Americans to avoid “the accumulation of debt” rather than “ungenerously throwing upon posterity the burden which we ourselves ought to bear.” Though Dwight Eisenhower presided over an impressive decline in the national debt, he nonetheless declared in 1960 “that it is absolutely necessary that we have savings to put on this debt that we are passing on to someone else.” The Reagan-Bush years saw endless handwringing (mostly from Democrats) about the immorality of passing deficits on to future generations. Even Senator Obama fretted in 2006 that “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”
But as Obama’s outgoing secretary of defense, Leon Panetta, said in 1988—when he was a California congressman reflecting on Reagan’s borrowing—the longer people warn of debt “doom and gloom” without the onset of crisis, “the harder it is to convince others that something needs to be done.” This may be the greatest danger of the continued argument that federal debt will harm “our children and grandchildren”: It gives younger voters the sense that a debt crisis is no nearer now than it was during all those past warnings.
Unfortunately, that sense is false. Our staggering debt will start causing serious problems well within the next 20 years—this generational window. And it will hit today’s younger Americans—not their offspring—hardest.
The debts we face now are not like any debts we have seen before. The U.S. debt-to-GDP ratio has spiked in the past only during wars or major crises like the Great Depression. Only once in our history has our debt as a percentage of GDP been higher than it is now—during and immediately after the massive mobilization for World War II, when it peaked at 108.7 percent. But that figure dropped dramatically in the 1950s, after the war ended and the United States enjoyed the economic boom made possible by the fact that virtually every other industrialized country in the world was in ruins.
Our deficits today, and our projected debt over the next two decades, are not climbing in response to catastrophes. They are not projected to come back down. The Congressional Budget Office (CBO) anticipates that they will rise inexorably, surpassing the World War II record and heading into uncharted territory sometime between 2025 and 2026. That’s when people now in their late teens, 20s, and early 30s will be working, paying taxes, and raising children—well before their children assume responsibility for the nation’s finances.
The main drivers of this debt are entitlement programs, and those, too, will pass solemn milestones on this generation’s watch. Medicare’s trustees project that the trust fund for Medicare Part A, which provides seniors with hospitalization coverage, will go bankrupt in 2024. Social Security’s finances, meanwhile, already slipped into deficit in 2010; the program’s trustees project that they will remain in the red indefinitely.
What’s more, because so much of the federal spending that will drive our growing debt is now locked in—as entitlement programs or as interest payments on existing debt—our fiscal and economic-policy options are increasingly limited. Paying down the debt will require massive structural reforms of major federal programs, the last thing any politician wants to tackle. Hence the series of fiscal-policy “crises” that have been engineered over the past few years. This has left citizens, businesses, and investors laboring under clouds of uncertainty about fundamentals like tax rates and government spending, which can hinder investment, spending, and hiring in the private economy.
These distinctive features of today’s debt problem are poised to exacerbate the two major consequences of excessive government debt: increased borrowing costs and economic stagnation. And those consequences will be most painful for today’s young Americans, not future ones.
Consider the danger of an interest-rate spike. The U.S. government has long been seen as one of the least risky borrowers in the world; the interest rates it charges set the pace for all other borrowing costs in America, including for private loans. Should the government have to pay significantly more to satisfy lenders concerned about its creditworthiness—or about the Federal Reserve inflating away the debt—American students, home buyers, entrepreneurs, drivers, and shoppers will pay more for their loans, too.
America’s creditworthiness will likely be most at risk as our debt begins to reach unprecedented levels—starting around 11 years from now and rising from there. That risk will coincide with the prime borrowing years of today’s young Americans. According to the National Association of Realtors, for instance, the median age of home buyers is 42; the largest age cohort of home buyers is 25-34; and younger buyers (aged 25-44) are more likely than older buyers (65 and up) to finance their home purchases (97 percent versus 56 percent). Americans in their early 30s or younger are thus most likely to be taking out mortgages right around the time interest rates could begin skyrocketing as America’s debt becomes unmanageable.
The same is true of other common types of borrowing. According to the Federal Reserve Bank of New York, the largest share of total student loan debt is held by Americans in the 30-39 age group. Today’s youngest voters, who might hope to go to graduate school in a decade or so, could find that climbing interest rates make student loans unaffordable. Meanwhile, according to the 2010 Survey of Consumer Finances, 72.8 percent of all vehicle loan balances are held by households headed by people aged 30-59, meaning today’s Americans in their early 30s and younger could pay steep interest rates when they are most likely to borrow to buy a car for home or business.
Credit card borrowing will be particularly painful for this generation of Americans. Unlike mortgages, which usually have fixed interest rates, credit cards tend to offer variable rates—meaning rising borrowing costs will be felt immediately by consumers. As a new study by Sarah Jiang of Capital One Financial and Lucia Dunn of Ohio State University explains, credit card debt generally increases when borrowers are younger, peaking around age 55. Jiang and Dunn also find that Americans born in the 1980s—people now in their 20s and early 30s—carry more credit card debt than their parents and grandparents did at the same age and pay it off much more slowly. Today’s Visa swiping young Americans will likely carry their heaviest credit card burdens precisely in the years when our government’s debts spiral out of control. Should a crisis drive up interest rates, Dunn says, today’s twentysomethings “would be very hard hit.”
In general, the Survey of Consumer Finances finds that total indebtedness peaks among households headed by Americans in the 40-49 age bracket. Today’s 20-year-old enters that range in 2033, the year in which Social Security is projected to go bankrupt and in which the national debt held by the public is projected to reach 165 percent of GDP. He exits that prime borrowing cohort in 2043—the year for which the CBO stops making specific projections because its model cannot handle debt that exceeds 250 percent of GDP. When politicians tell the nation, including young voters, that the consequences of government’s reckless borrowing will be borne by “our children and grandchildren,” they’re peddling a dangerous deception. If you’re alive and working now, youwill bear those consequences.
This is especially true considering that today’s younger Americans may face the other grave danger of high debt—economic stagnation—even sooner. Americans save only so much money; as the CBO explained in a 2010 report, under “persistent deficits and continually mounting debt . . . a growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that ‘crowding out’ of investment would lead to lower output and incomes than would otherwise occur.” Also in 2010, economists Carmen Reinhart and Kenneth Rogoff tried to quantify the relationship between government debt and GDP growth, finding that the economic harms in advanced countries become noticeable when gross debt (debt held by the public in addition to the money the government owes itself) exceeds 90 percent of GDP. The United States passed that threshold in 2010; last year, the gross debt figure stood at 104.8 percent.
If growing debts prolong our economic stagnation—extending today’s high unemployment, suppressed wages, and anemic growth—the results could be devastating for today’s younger Americans. There are the stories of college graduates who can’t find jobs and of young adults returning to live with mom and dad, and there are the numbers: Last month’s unemployment rate for Americans between the ages of 20 and 24 was 14.2 percent,much higher than the national average of 7.9 percent. As debt rises indefinitely, Americans in their late teens and 20s could experience a “lost decade” like the one that harmed so many young people in Japan. Researchers have observed that most wage growth and job mobility happen in the first 10 years of a person’s career; for young people now in that crucial stretch, years of debt-induced economic languor (not to mention recession) could be poisonous to their lifetime earning prospects.
Some, of course, will deny the imminence of debt “doom and gloom.” Interest rates, for instance, are at rock bottom and are expected to remain there. But this is only a temporary condition, resulting from the Federal Reserve’s commitment to keep rates low until hiring picks up and from the fact that, while U.S. debt is growing fast, many other industrialized countries are in worse shape. A debt crisis, however, would take the power to control interest rates out of the Fed’s hands. And it would be the definition of hubris to assume that no other country will emerge as a promising investment prospect in the next two decades.
All of this adds up to a dire warning that should be heeded above all by the young Americans whose aspirations are most likely to be crushed by our fiscal mismanagement. But it is unlikely to be, as long as our politicians insist that the reason to control our debt is our “children and grandchildren.” This throwaway line may appeal to older Americans, but they already vote for candidates who promise to cut spending and reform entitlements. It now desperately needs to be supplemented with an honest, fact-based argument aimed at the self-interest of younger voters.
There is no shame in appeals to self-interest, as our greatest political rhetorician understood. Invited to address a temperance society in 1842 about how to make its appeals more effective, Abraham Lincoln advised his listeners to speak less about the distant future and more about today. “Posterity has done nothing for us,” he said. “And theorize on it as we may, practically we shall do very little for it unless we are made to think we are at the same time doing something for ourselves.” Today’s fiscal hawks could use that advice.
Meghan Clyne is managing editor of National Affairs.