The late economist and former chair of the Council of Economic Advisers, Charles Schultze once said: "The deficit isn't the wolf at the door; it's termites in the woodwork." This clever imagery reminds us that debt won't blow our house down, but it will eat away at its foundation. Mr. Schultze's keen observation stands in sharp contrast to a rising chorus of opinion leaders who argue that deficits don't matter. I beg to differ.
The deficit--which measures the amount by which the US government's total budget outlays exceed total receipts for a fiscal year--tallied $779 billion in the fiscal year of 2018 and is expected to surpass $1 trillion this year. It's grown in each of the past three years despite the US economy's strong performance and Republican leadership in Congress and the White House. Our country now faces a total debt held by the public of approximately $16.1 trillion ($22 trillion when including intragovernmental holdings).
To pay that debt back every man, woman, and child would need to write a check (or make a Venmo transfer) of $49,271 to the US treasury.
William Gale co-directs the Tax Policy Center and has just released an insightful book about America's fiscal challenges titled, Fiscal Therapy: Curing America's Debt Addiction and Investing in the Future. Mr. Gale writes: "There is a well-established consensus among experts that our current path is unsustainable and will do long-term damage to the economy. It is imperative that policymakers put fiscal policy back on a sustainable course."
He then references a passage from Ernest Hemingway's The Sun Also Rises where one person asks another: "How did you go bankrupt?" The second person replies: "Two ways, gradually, then suddenly."
Mr. Gale describes both scenarios for the US economy. He calls the gradual scenario "termites in action." This is the corrosive impact of two types of crowding out. The first occurs as debt rises and interest payments become a larger share of the budget. This crowds out the other spending important to national wellbeing such as investment in human and physical capital.
The second form of crowding out occurs as more public debt creates an increase in interest rates and makes it more expensive for the private sector to borrow. Productivity suffers when businesses invest less in factories, equipment, and training. By crowding out private investment, public debt negatively impacts productivity, the ultimate driver of long-term growth.
In both of these...