Deficit Attention Disorder : The Indicator from Planet Money The CBO projects the federal budget deficit could top 800 billion dollars this year... and reach a cool trillion by 2020. So ... what?

Deficit Attention Disorder

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Two of the biggest economic events we've seen in the U.S. in the last year have been the tax bill passed in December and the big spending bill that was approved last month. And economists and politicians have been debating the impact of these bills. Would this add a lot to the federal deficit? Would it grow the economy? Is this economic disaster, economic boost?


And everyone was waiting for this one report from the Congressional Budget Office. The CBO is part of the government, and it provides economic and budget information to Congress. It's nonpartisan. A lot of people trust it, but everybody pays attention to what it says.

JARED BERNSTEIN: So many of us were anxiously waiting to see what the CBO said, and now we know.

VANEK SMITH: Jared Bernstein is an economist at the Center on Budget and Policy Priorities. He also worked on President Obama's economic team, and he was one of the people waiting for the CBO report, which came out on Monday.

BERNSTEIN: So when it comes to the tax cut, for example, the CBO found that will - that it will add just under $2 trillion to the national debt by 2028.

GARCIA: That sounds like a lot. Is that a lot?

BERNSTEIN: You know, that's a good question. Let me see. It's a harder question than you think.

VANEK SMITH: I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia. This is THE INDICATOR, where every day, we tell you a short story about the economy. Today's story - what does a big budget deficit mean for the economy and for the future?


VANEK SMITH: The big takeaway from the Congressional Budget Office report is this - the federal budget deficit is about to go up - way up - and so is the debt.

GARCIA: And there is a difference between the deficit and the debt. Here's how it works. When the government doesn't raise enough money in taxes to pay for all of its spending, it borrows the extra money it needs. And however much it borrows in a single year is that year's deficit. And every year that there's a deficit, it adds to the overall amount of the country's debt.

VANEK SMITH: For example, right now, the CBO estimates this year's deficit is going to be $804 billion. And that is today's indicator - $804 billion. That is the shortfall between tax revenue and how much the government will spend this year.

GARCIA: And this is going to add to the national debt because the national debt is basically the grand total of all the deficits that the government has run in the past. And this year, the national debt is, according to the CBO, expected to reach $15.7 trillion.

VANEK SMITH: That is a lot of trillions.

BERNSTEIN: We throw around billions and trillions, but it's actually really important to talk about this stuff as a share of the economy. So right now, the debt as a share of our economy is around 77 percent - that's actually quite high in historical terms. Well, CBO now projects that it's going to go up to well north of 95 percent by 2028. So we're really talking about numbers that we haven't seen in terms of debt to GDP since World War II when we had a really good excuse for inflating the debt.

VANEK SMITH: GDP, or Gross Domestic Product, is a measure of the economy. It is a tally of all the goods and services an economy produces in a single year. And, as Jared just said, within the next decade, that debt as a share of the economy is expected to get as high as it's been since World War II. So running a really high deficit - is that so bad?

BERNSTEIN: The thing about deficits is that you really can't say deficits are good or deficits are bad. It's very time-dependent. So when you're in a recession, your question should never be, is the deficit too large? It should be, is the deficit large enough to temporarily offset the cyclical downturn?

GARCIA: Now our economy is not in a cyclical downturn right now. Our economy is growing. And when the economy's growing, you would think that the deficit would be shrinking every year because when the economy grows, people and companies make more money, so they pay more in taxes. More tax revenue means less borrowing is needed by the government - voila, smaller deficits.

VANEK SMITH: But the CBO report says that is not what's going to happen. The deficit will actually be going up even though right now the economy is growing. And there are a few reasons for this. One of the big ones is that we have an aging population, so a lot more people are going to be using services like Medicare and Social Security. But another reason for the growing deficit is the tax cut. And this idea of a growing deficit in a growing economy - this worries Jared.

BERNSTEIN: So I worry about budget deficits for two reasons. First, there is increased interest payments on the public debt. And when your debt is really large, even a little increase in interest rates can make that part of government spending more expensive.

VANEK SMITH: Reason number one to fear the deficit - interest payments. So one of the main ways the U.S. government raises money is by selling its debt.

GARCIA: Through Treasurys.

VANEK SMITH: Treasurys.

GARCIA: Selling Treasurys. The government sells Treasurys. Investors buy Treasurys. And because these investors are essentially lending money to the government, they get paid interest by the government. Jared is saying that as the U.S. debt goes up, the government will have to issue more Treasurys to raise money, and therefore, make more interest payments. And all those interest payments - they can add up.

VANEK SMITH: And there's another potential issue with Treasurys that the CBO also talks about in its report, which is the possibility that interest rates on those Treasurys will go up. And this is because investors might see all of this new debt the U.S. is issuing and think U.S. Treasurys are a riskier investment than they used to be, and they might demand a higher interest rate. But there is a second reason Jared is worried about the deficit, and this reason is less about economics and more about psychology.

BERNSTEIN: Somewhere out there is a recession - a downturn. I don't know where it is. I hope it's far away from where we are right now. And when we hit that recession, if your debt burden is 80 percent - 85 percent, which is where CBO tells us it's going, the Congress will be far less likely to enact the necessary offsetting fiscal policies - the kinds of programs that help people in a downturn. So what I worry about with these very high budget deficits is the absence of perceived fiscal space.

VANEK SMITH: Jared worries that when the budget deficit is really high, the government won't be willing to do what's necessary to fight a recession. So even if the government should borrow money at that moment to help the economy and keep people employed, it won't because people are so worried about the deficit, they won't want to borrow any money.

GARCIA: Jared says historically, that is exactly what's happened. When a country's debt-to-GDP ratio is low, it has tended to spend more money more quickly to help its economy after there's a financial shock. And, of course, the reverse is also true. When the debt-to-GDP ratio is very high, a country will be less likely to spend money fast and aggressively to help its economy. And right now, the national debt is growing. Jared cites a recent paper for all this from economists Christina and David Romer.

VANEK SMITH: Jared also worries the concerns about the deficit will cause legislators to cut programs like Social Security. The same legislators, he said, who passed the tax bill and the spending bill in the first place - the bills that are leading to these higher deficits.

BERNSTEIN: They're in violation of what I've called the Bernstein Rule. So you want to hear the Bernstein Rule?

VANEK SMITH: Oh, my gosh. You have a rule named after yourself.

BERNSTEIN: Well, I named it after myself.

GARCIA: Self-named after himself, right?

VANEK SMITH: (Laughter).

BERNSTEIN: Yeah. Is that a bad thing to name a rule after yourself?

VANEK SMITH: No, I think it's fantastic.


GARCIA: The best thing.

VANEK SMITH: I really want to hear the Bernstein Rule. This is the best thing.

BERNSTEIN: So here's the Bernstein rule. If you voted for the tax cut, you can't complain about the deficit.

GARCIA: I like it.

VANEK SMITH: What is your enforcement mechanism?

BERNSTEIN: Yeah, I'm still working on that.

VANEK SMITH: In a lot of ways, Jared says, the problem with a lot of debt is that people are afraid of a lot of debt.

BERNSTEIN: The worst thing about deficits is that people are really scared of them and will do things that I view as foolish, like not offsetting a recession. And I've often accused Washington of having Deficit Attention Disorder, which is...

VANEK SMITH: (Laughter) That's so great.

GARCIA: That's Bernstein Rule number 42, I think.

VANEK SMITH: Oh, I love it.

BERNSTEIN: ...Paying excessive attention to deficits just based on, really, no substantive economic thinking.

VANEK SMITH: I really am appreciating all of your Bernstein Rules, too, by the way.

BERNSTEIN: Thank you.

VANEK SMITH: Is the first Bernstein Rule that you cannot talk about Bernstein Rules?


VANEK SMITH: (Laughter) Oh, that's good for us.

GARCIA: The first Bernstein Rule is that you must talk about Bernstein Rules.

VANEK SMITH: That you must talk about Bernstein Rules.

BERNSTEIN: My wife doesn't like Bernstein Rules.

VANEK SMITH: (Laughter).


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