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Defusing the Debt Bomb

Before it’s too late.

Jan 25, 2010, Vol. 15, No. 18 • By MATTHEW CONTINETTI
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“This cannot work,” says New Hampshire Republican Judd Gregg, “unless it’s seen as totally bipartisan and fair.”

Gregg is the ranking member of the Senate Budget Committee. He is talking about his proposal, coauthored with committee chairman Kent Conrad of North Dakota, to establish a bipartisan task force to fix America’s finances. The “Bipartisan Task Force for Responsible Fiscal Action Act of 2009,” the result of two years of negotiations, made its debut last month. It has 35 cosponsors. If it becomes law, Congress will have to vote on the 18-member commission’s recommendations to increase revenue and restrain spending—no ifs, ands, or buts. Similar legislation is pending in the House.

“Pending” is what it is likely to stay. Though the public is increasingly concerned about the rising debt, the political class seems equally convinced that a commission is not the way to address the problem. It’s a rare initiative that earns derision from both liberal bloggers and the Wall Street Journal editorial page, but that is precisely what Conrad-Gregg has done. The left says the senators have rigged the legislation to make it impossible for the commission’s recommendations to pass; the right says it’s window-dressing that will result in minor spending cuts and major tax increases.

All of this is meaningless, however, unless the commission gains the support of 60 senators. And that may take a while. Democrats are hesitant to endorse a commission that would restrain or means-test entitlement spending. Of the 35 cosponsors, 20 are Republicans. Gregg says the only way to get more Democratic support would be for the president to endorse the proposal. But, at this writing, the White House is more interested in a bank tax and other revenue measures than a binding commission. “Personally, I haven’t heard anything from the White House,” Gregg says.

Whatever the White House does, the national debt figures to be a major issue in the 2010 midterm elections. Thanks to the financial crisis, recession, and profligate spending by both Republicans and Democrats, the deficit and debt are at postwar highs. U.S. public debt is 53 percent of GDP and rising.

A new study from the Peter G. Peterson Foundation projects it will reach “85 percent of GDP by 2018; 100 percent by 2022; and 200 percent in 2038.” As historian John Steele Gordon noted in Hamilton’s Blessing, we are a long way from 1916, when John D. Rockefeller could have paid off the entire national debt out of his own pocket.

What debt can do to a society is well known. Besides the restrictions it places on future generations, excessive government borrowing crowds out private investment and can lead to higher interest rates. More and more of the budget goes to servicing the debt—money that buys nothing but satisfied creditors.

There is new evidence that massive debt hampers economic vitality. In a January 2010 paper, “Growth in a Time of Debt,” economists Carmen M. Reinhart and Kenneth S. -Rogoff find that, above a debt-to-GDP ratio of 90 percent, “median growth rates fall by one percent, and average growth falls considerably more.” Consider Japan, where public debt hovers around 200 percent of GDP and the economy has been stagnant for a decade and counting.

Anyone who has read a paper over the last year is aware that the tools governments use to fight debt are just as unpleasant. Since spending cuts are politically unpalatable, officials hike taxes and thus reduce incentives for entrepreneurial risktaking, investment, and research. Another tactic is inflation, a silent tax on the middle class that punishes saving. Default and currency devaluation? They are signs of second- (or third- or fourth-) rate powers.

Take Greece, for example. The new center-left government has come to power at a time of economic crisis and political upheaval. The deficit has spiked to almost 13 percent of GDP. Public debt is 113 percent of GDP and rising. Standard & Poor’s has downgraded the nation’s credit rating. Foreign powers are urging the government to cut expenses as a potential default looms.

It will take more than a blue-ribbon commission to avoid a Grecian fate. The only pain-free way to lower the debt burden is economic growth; that is how America recovered from World War II, when our debt-to-GDP ratio was a record 122 percent. But no one knows when the next boom will start. And the Democratic playbook of tax, spend, and regulate may delay it.

Another precedent suggests a happier ending, however. The divided government of the mid-to-late 1990s cut spending, limited tinkering with the economy, and presided over a tech boom that poured money into government coffers. The lesson is plain. Want to defuse the debt bomb? Elect a Republican Congress.

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