America’s fixation on short-term fiscal policy is shortsighted–and it has serious generational consequences. For several decades, one of the most glaring defects in American fiscal policy has been its narrow focus on what is politically popular at the moment. We too often ignore the long-term effects of measures that may be politically attractive in the short term, but harmful in the future, such as the long-term costs of how much our government spends on non-vital programs or big tax cuts that serve no major national purpose other than satisfying powerful interest groups. We need to shift gears–and Australia’s intergenerational approach may be a good model of long-term thinking.
Legislative and political debates pay little attention to how much and in what ways the rapidly rising debt from spending and tax cuts will burden our government and society in the future. Tough decisions on how to put our nation’s finances and key federal programs on a fiscally sustainable footing over future decades are largely avoided.
If there is an overall policy at all, it seems to be one of kicking the can down the road. In so doing, it leaves even tougher decisions to future presidents and Congresses. It shifts the repayment and interest burden to successor generations: our children and grandchildren, who will inherit enormous financial obligations. They will have to repay these huge burdens–or shoulder astronomical interest costs.
Someone has to pay
A country that in many ways is similar to our own, both politically and economically, a democracy with a robust market economy, may have found an effective approach. Every five years, Australia publishes an Intergenerational Report. This contains a series of projections for future decades, looking as far as 40 years ahead. It does so in various areas, including demographic, environmental, technological, economic, and budgetary policy. The report receives widespread public attention and plays a role in educating the nation's population about the long-term implications of current policies and trends. Most importantly, it serves as a guide to the future fiscal implications of current policy. Understandably, younger generations of Australians pay particular notice.
One aim, as Oxford Analytica cogently points out, is to encourage leaders “to make long-term developments part of the current decision-making process.” It encourages the electorate and government to think about how current policy decisions will affect future generations and the ability of the country to address future challenges.
Lately, a major feature of this report has been how rapidly the number of older citizens is growing as a portion of the nation’s population and how much the cost of pensions, retirement funds, and health care programs will grow as a result. The goal is to ensure that those in government responsible for current tax and spending programs, among other things, and the nation's voters bear these future consequences in mind when legislative or voting decisions are made.
Several years ago, I wrote a book entitled The Price of Liberty: Paying for America’s Wars from the Revolution to the War on Terror. I pointed out that the U.S. has traditionally borrowed heavily during wartime, recognizing that such costs could not be paid for by current taxes alone. Afterward, while they had no formal intergenerational report to guide them, the country’s leaders realized that large debts incurred during wartime could not be sustained. The political system came together to reduce the government's debt over the coming years.
Cuts in military spending, of course, were a key element, since large amounts of such funds were no longer necessary. Other measures included restraint in domestic spending and prioritizing the money that was spent. Infrastructure, greatly needed after the Civil War, as well as the Eisenhower Highway System after the Second World War, were two good examples of priorities that did receive needed funds. These could be managed financially given that the government’s post-war fiscal position was improving dramatically. While not without controversy, a substantial consensus between the major parties was mustered to slash post-war debt and achieve sound fiscal policy. The nation’s debt dropped dramatically after the War of 1812, the Civil War, and both World Wars.
In recent decades, large sums have been devoted to programs that moved through Congress due primarily to their current attractiveness for various powerful political constituencies rather than to serve broad and urgent national interests
In recent decades such fiscal responsibility (although apparently desired by large numbers of Americans asked in various polls) has not been seen as a significant political objective for large numbers of candidates, officials, or voters. Government spending rose substantially to finance programs during the pandemic–an appropriate objective given the many urgent needs of our population and the country as a whole. However, the use of some of these funds should have been monitored better to avoid various types of misuse and curb the size of such spending.
Similarly, large tax cuts in recent decades have primarily been politically inspired. Many were the products of bipartisan compromises resulting from the fact that each side got something for its political constituents. However, the impact on the nation's longer-term deficit and debt received little attention. Many of the tax cuts or additional spending initiatives were not needed to boost the economy or to achieve other important national objectives. Moreover, there were no long-term provisions in the legislation to offset the substantial impact of these measures on the deficit and debt.
Many officials have become reluctant to advocate tough remedial measures. Indeed, if there is any type of sustained consensus in Washington, it has been around the already demonstrated myth that large amounts of borrowing can continue with NO adverse consequences. Or that they can be paid for through growth. Or the old bromide that the answer lies in reducing so-called “waste, fraud, and abuse,” a good idea that won't make more than a small dent in the country's $32 trillion debt. The resulting common political wisdom is why not just avoid discussing measures needed to restrain or reverse borrowing and debt. Blithely passing the fiscal problem to future generations.
The costs of ignoring this massive debt accumulation are high. During the next presidential term, publicly held debt is projected to rise from the current 102% of GDP to 107%. That exceeds the peak the country reached in the Second World War, the highest level ever in our history. Yet in the two decades that followed that war, both parties agreed that the debt had to be reduced–dramatically. Legislators and presidents, specifically Truman and Eisenhower, alongside fiscally responsible Congress members on both sides of the aisle, brought the debt down quickly to 23% of GDP.
No such prospect is likely now. Over the next decade, federal debt is likely to reach 115% of GDP. Interest costs are predicted to rise to a total of $10 trillion during that period. All told, interest payments will exceed defense and Medicaid costs combined. It gets worse: 20 years later, the debt is anticipated to rise to 181% of GDP.
No simple solutions
These are not just abstract numbers conjured up by economists–they have serious and tangible implications for all Americans. Higher interest rates will make, commercial borrowing, credit cards, mortgages, and financing of cars and other big-ticket items far more expensive. High rates also seriously slow growth and job creation. Cities and states with already large interest burdens and liabilities will be unable to afford many vital programs. Lower-income groups will suffer the most. Funding for public security and health care for low-income groups will be a growing problem. Social unrest could be one serious outcome.
The massive deficit also will crowd out spending for vital national programs relating to public health, caring for the elderly, education, and climate change, among others. It will also increase the difficulty of borrowing to address future emergencies such as another pandemic, to provide stimulus in the event of a future recession, or pay for a future war or for the defense costs of preventing one.
Suggesting that candidates for the presidency, Congress, and state and local offices put forward specific tax increases or proposals to cut spending for new programs supported by large contributors in a campaign season is probably unrealistic in the current environment. Few candidates have done so in the recent past. But it should not be too much to ask candidates to commit to ensuring that any spending increases or tax cuts they support be aimed at achieving important national priorities rather than simply be politically attractive–and that they are offset in the SAME or accompanying piece of legislation by tax increases or spending cuts in other areas. Vague promises or pollyannish outlooks that budget deficits and debt will be resolved by growth alone need to be called out for what they are: common techniques for sidestepping the problem. This approach serves only to divert attention from real solutions and convince voters to think the situation is under control when it is not while also undermining the credibility of our political system.
Moreover, compromise and bipartisanship should not be forbidden words. Both are likely to be essential to find long-term solutions. Solutions must not be limited to raising taxes or cutting spending programs. There is no one single or easy solution.
In the countless debates and press opportunities that will occur between now and next year’s elections, candidates for federal (and indeed state and local) elections should be questioned on such issues. The more honest the debate, the greater the chance that voters will recognize the need for “significant tradeoffs and sacrifices” and “help to educate them and…create a mandate for needed change,” as the Committee for a Responsible Federal Budget puts it.
A generational reckoning
The key to mobilizing a consensus on how to approach the serious fiscal prospects that lie ahead lies in increasing public understanding of the implications for them as individuals, as well as the country as a whole. As bad as the numbers are, the average American cannot easily identify with enormous aggregate sums in the billions or trillions. People do not live in the aggregate. They live with everyday problems of interest rates, the cost of goods and services, the ability to obtain critical government support if needed in the future, the reliability and adequacy of their health care and social security benefits–vital personal and family issues.
So political leaders must explain the problem as it relates to these people. They must do so by working with constituencies that have a stake in the future financial stability and solvency not only of the country but also of key government programs people care about as mentioned above. They also need to recognize the implications of “kicking the can” down the road and failing to find areas of consensus on fiscal stability. The longer we wait, the situation gets worse and more difficult to resolve.
There is a significant generational component to this problem. For younger Americans, the future impact of these problems on them looks very distant. The financial situation looks to them like one that just impacts older generations. However, failure to address these issues now does impact them if they are trying to finance a new house or car, or their education. And it increases the chances that as they get older these matters, if not controlled soon, will severely undermine the nation’s security and ability to address national health crises or financial emergencies–and ultimately these generations’ ability to benefit from Social Security and Medicare. In future decades, they will bear a larger and larger burden of continued inaction.
Over the years, a wide range of government programs and taxes have been written into legislation. Some are still of major importance to the country. Others are not. Some were necessary or affordable in the past. Many now are not.
The effort to correct the ballooning deficit and debt begins with curbing the political appetite in Washington for spending programs or further tax cuts that only benefit constituencies who don’t need them. Second, lawmakers must remove spending measures and tax benefits introduced in the last couple of decades that now are not critical to vital national or human needs or are unaffordable.
Finally, we need to hold an intergenerational discussion. New benefits and tax cuts should be paid for in this generation, not shifted to future ones. An intergenerational report like that of Australia can provide a framework to give all Americans a clear view of the impact on each of us if we do not correct our current course.
Robert Hormats is a visiting lecturer at Yale School of Management, former undersecretary of state, and former vice chairman of Goldman Sachs (International). His analysis of generational issues was based on thoughtful inputs from his wife Catherine.
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