Warning against complacency over the federal deficit, Ben S. Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a “calm before the storm,” masking a long-term danger posed by looming deficits in Social Security and Medicare.
According to the CBO projection that I have been discussing, interest payments on the government’s debt will reach 4-1/2 percent of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100 percent was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate. Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.
Testimony of Chairman Bernanke from the Fed’s website.
There is a so-called "soft" trigger — under the Medicare Modernization Act — which will require the President to propose Medicare cuts if Medicare projections next year repeat this year’s projection that Medicare expenditures will exceed dedicated revenues by more than 45%. This year’s projection sees that coming in 2012. If there is another such projection in next year’s Medicare trustees’ report, then that so-called soft trigger will be pulled. See the Health Affairs Blog post on this topic from last month, the testimony of the Comptroller referenced in that post (esp. pp. 9-11), and the GAO report referenced in that testimony.
Bernanke clearly does not expect the soft trigger, on its own, to magically do the trick.
About twenty years ago, the deficit spending of Reaganomics sparked a similar crisis and motivated the passage of the Gramm-Rudman-Hollings balanced budget amendment, which seemed like a worthy effort — Congress trying to control its own profligate spending. It was challenged in the courts and ruled unconstitutional because of the automatic cuts built into the law. It was revised and later replaced by other balanced budget legislation — all in all, an appealing idea at some level but, in the end, a failure as a policy matter.
It may be difficult to construct a "hard" trigger that would pass Constitutional muster, but that certainly seems to be what we need — and desperately. If our elected representatives do not do so, or if they do not otherwise face the grim facts laid out by Bernanke (or other economists who suggest that rules about retirement age, Social Security and Medicare entitlements need to be rethought at a more fundamental level given changes in life expectancy — see, e.g., discussion towards the end of a recent Open Source radio show), then we will be staring down an intractable problem in the not-too-distant future.