Paul Ryan’s latest budget is being slammed for, among other things, balancing. Under Ryan’s proposal, the deficit would gradually shrink before disappearing entirely 10 years from now.
Ryan’s critics say that the federal government doesn’t need to balance its books, and that trying to hold spending even with revenues is foolish. Better to keep taxes a little lower and government spending a little higher, as long as deficits don’t get too big.
The way Bloomberg View’s Evan Soltas see it, “We could run a budget deficit every year for the next century. We’d be just fine.” In fact, Soltas argues, “we have much more to lose by trying to run a balanced budget when we shouldn’t be.”
The White House seems to agree. Earlier this week, Obama press secretary Jay Carney announced that the president’s new budget, which is expected to be released sometime in the next month, won’t balance. Instead, Obama’s budget will put the federal government on a “fiscally sustainable trajectory,” one where deficits stay under 3% of GDP.
It’s not an unreasonable position. As long as the debt grows slower than GDP, the nation’s debt-to-GDP ratio will fall. The U.S. debt-to-GDP ratio fell by more than two-thirds in the three decades between the end of World War II and the election of Jimmy Carter even though the federal budget was only balanced eight times during that period. The Congressional Budget Office pegs the long-term U.S. growth rate at 2.2%, which means Washington should be able to run 2% federal deficits well into the future without increasing the national debt.
But just because it’s possible to run budget deficits forever doesn’t mean we should plan on doing so. Federal deficits generally exceed expectations — for a variety of reasons, politicians tend to overestimate future revenue and underestimate future spending. The result is that, despite politicians’ rhetoric about the importance of balanced budgets, the federal government runs a significant deficit almost every year. There have only been a dozen surpluses since 1930, and none since 2001. If Washington politicians run deficits when they’re trying to balance the budget, won’t they run even bigger deficits when they’re not trying to balance the budget?
There isn’t much room for error. Economists Carmen Reinhart and Kenneth Rogoff have found that debt-to-GDP ratios above 90 percent of GDP reduce economic growth by 1% a year or more. A new study from economists David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin suggests that countries with debt-to-GDP ratios above 80% are at heightened risk of debt crises. The U.S.’s public debt is currently 76% of GDP — up from 41% of GDP four years ago — and continues to increase. That debt is probably already damaging our economy. If it isn’t, it will be soon.
Under Paul Ryan’s plan, the public debt would still be around 50% of GDP in the mid-2020s, which is higher than it was before the recession but low enough that the U.S. would be able to comfortably absorb a sudden surge of debt from a major war or a severe recession.
One of the reasons that actual deficits tend to exceed forecasted deficits is that politicians have trouble sticking to long-term budgets. The electoral incentives of repealing spending cuts, lowering taxes, and creating new programs are too great. That’s why it’s a safe bet that the federal budget won’t be balanced anytime soon and lawmakers would quickly stray from the Ryan budget if it ever became law. But it’s better to use a budget that balances as a fiscal blueprint than a budget that doesn’t balance — that way, at least there’s a built-in cushion.
We can start encouraging our politicians to run deficits as soon as we start electing politicians we can trust to actually hit their deficit targets. In the meantime, we should tell our elected representatives to look for ways to balance the budget.
Peter Tucci is an editor at The Daily Caller.