Good morning.
Do deficits matter?
I have spent much of my career in the vicinity of that question, having covered U.S. fiscal policy as a cub reporter in the 1980s. That’s when supply-side Republicans dropped their concerns about deficits to push tax cuts as a counter to Democrats who had already abandoned deficit concerns to push spending increases. A stalwart but steadily shrinking group of people continued to beat the deficit drum, arguing deficit spending would “crowd out” private investment. But the new millennium obliterated that argument, too, by making capital plentiful and free. “Crowding out” went the way of the Walkman.
Well, suddenly, they’re back. Deficits, that is. I’m not sure the last time a deficit story led the New York Times, but yesterday morning, it did. The story quoted new Congressional Budget Office projections showing a combination of pandemic-era spending, aging boomers and rising interest rates would add $19 trillion to the U.S. national debt over the next decade—$3 trillion more than previously forecast. Total debt outstanding will equal the total economic output of the U.S. economy next year and reach 118% of GDP in 2033.
Meanwhile, “crowding out” has taken on new meaning. It’s not that deficits might crowd out private investment—the case for that remains weak, given inflation-adjusted interest rates that are still close to zero. Rather, the new numbers show that as nominal rates rise, servicing the debt will rise faster than tax income, eating up more and more of the federal budget, and leaving less money to address real needs.
So what’s to be done? With a vibrant economy and a functioning federal government, the problem is solvable. The Committee for Economic Development, which is part of The Conference Board, laid out a reasonable road map earlier this week, which you can explore here. (Full disclosure: My wife is president of CED.) But while the U.S. has a vibrant economy, it still lacks a functioning government. Deficit reduction involves shared sacrifice, and that has to be done on a bipartisan basis. Don’t hold your breath.
More news below. And don’t get too excited about the uptick in home prices at the start of this year. Fortune’s Lance Lambert says they are headed south again.
Alan Murray
@alansmurray
alan.murray@fortune.com
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