In its latest budget outlook, released this week, the Congressional Budget Office projected that federal debt will be almost stable as a share of the nation’s gross domestic product for the next decade.
Many in Washington took the CBO report to mean “mission accomplished” on deficit reduction. That’s because 10-year stability for the debt-to-GDP ratio has become widely accepted as the right policy goal, especially since the “fiscal-cliff” deal in January.
The Center on Budget and Policy Priorities, a liberal think tank, released a high-profile study finding that the mandatory spending cuts known as the sequester and the cliff deal’s tax increases were almost enough to do that. President Barack Obama, in a news conference last month, called for $1.5 trillion in further deficit reduction -- an amount that would bring the debt slightly below its current level by 2023.
All this is foolish. The best course is to stabilize the debt over the business cycle rather than over an arbitrary period. Depending on the way one looks at the economy and the federal government’s budget, that could mean that we’re either tightening too slowly or too quickly.
If current budget deficits come from a weak economy -- and they largely do -- then severe fiscal tightening may introduce more cuts than are necessary to stabilize the debt over the business cycle. And to keep debt stable during the cycle, focusing on the next 10 years isn't enough. Significantly more medium-term fiscal contraction will be needed. (Let’s put aside the long-run issue of rising health costs, which send deficits sky-high in the 20- to 30-year window.)
If the U.S. were on a stable fiscal trajectory, we’d expect to see a wave pattern in a graph of debt-to-GDP over time. Budget deficits in recessions would run up debts, which would be paid down by surpluses in fat times. We don’t see that. Since 2000, ours has looked more like a staircase: Debt rises in recessions but holds roughly stable in the good times.
Plans to stabilize the debt over 10 years only repeat this mistake. We need to actively reduce the debt over that time -- or else when the next recession comes, we’ll climb the next stair on the way to ever-higher government debt.
(Evan Soltas is a student at Princeton University and a contributor to the Ticker. Follow him on Twitter.)