Let’s say someone wants to buy a shiny new sports car but doesn’t have the $50,000 in cash to pay for it. Let’s say this person has $10,000 a year in income to devote to car payments. In a perfect world, he’d go to his friend and borrow the money at no interest, with a promise to pay it back in full in five years. Essentially he wants five years of funding to finance one year’s major expenditure. It’s a dollar-for-dollar wash if he has friends willing to lend him the money with no interest. Now let’s say our hypothetical consumer wakes up from his perfect world and has to go to a bank to take out a loan. Lo and behold, he has to pay interest. That’s real money on top of the sticker price of his four wheels of fun. In the real world, five years of $10,000 doesn’t buy you a $50,000 car.
But that’s what the president and his supporters want you to think when selling the American Jobs Act on the campaign trail. The American Jobs Act (for simplicity, we’ll use the version that came before the Senate) costs the federal treasury a lot up front, but then relies on 10 years of revenue to come out as essentially a wash over the full budget window. Some of the policies don’t spend out immediately. For example, over 70 percent of the outlays associated with “immediate” transportation spending don’t spend out until 2014 and beyond — shovel-ready anyone? However, most of the costly policies are front-loaded, which is why for 2012-2016, CBO estimates the Act will increase the deficit by $302.9 billion. The 10-year deficit effect, on the other hand, is a reduction in the deficit by $3.2 billion.
So, just like our car-shopper, the federal government will have to go out and borrow money from the public to finance the near-term expenditures. In the later years, when the costly policies turn off, and the revenue stream remains on, the federal government will borrow less from the public than it otherwise would. But it’s not a wash. In fact, the large pile-up in initial debt will have to be serviced over time, and those costs will significantly outstrip the $3.2 billion in 10-year deficit savings. In fact, the debt build-up will require $63.7 billion in debt service, based on CBO data. As the United States is running a deficit in excess of $1 trillion, any un-offset costs, in this case the debt-service net of residual savings, must be borrowed. Therefore, on net, the American Jobs Act will increase the debt by $60.5 billion over 10 years. In the nearer term, the debt run-up is far more substantial — peaking at $426.4 billion in 2013.
So, when the president tells us that “the American Jobs Act is not going to add to the debt,” he’s not telling us the whole story. Sure, if the U.S. had the cash sitting around to finance the near-term deficit binge, then this wouldn’t really be any issue. But we don’t. Instead, we are on a one-way street to financial collapse. And the president’s shiny new car will only get us there faster.
Gordon Gray is the director of fiscal policy at the American Action Forum.