Why you should care

How Congress fixes America’s fiscal woes will hit nearly everyone in the pocketbook.

Sales are booming at Koons Tysons, a big Chevy and Buick dealer just outside the nation’s capital, says sales manager John Gribbins. And why not? The economy is picking up, gas prices are down and GM keeps throwing in great incentives like cash rebates and cheap leases. Gribbins helps car buyers figure out which incentives make the most sense including zero-interest-rate loans for folks who are financing bigger buys, like a recent deal on the Buick Enclave.

These days, investors around the world are behaving much like GM in its effort to move new vehicles: They’re practically busting down the door of the U.S. government to lend money with ultra-low interest. Rates on long-term, 30-year bonds, for example, have fallen again after a brief uptick last year, and were recently plumbing historical lows around 2.6 percent. But will the U.S. government take the catnip and actually borrow more money? If so, the move could hit the pocketbooks of millions of present-day millennials down the road.

Harvard economist and former Treasury Secretary Larry Summers was one of the first establishment types to call for taking advantage of rock-bottom long-term rates by borrowing more moola and lifting government investment for stuff like roads, bridges and airports, or education and scientific research, which could potentially boost economic growth. Now a gaggle of the Washington policy glitterati is glomming onto the idea that America’s monster national debt might not be so scary after all, or at least not scary enough to warrant emergency action. “There’s quite a lot of evidence that interest rates will be lower in the future” than was recently assumed, says Douglas Elmendorf, dean of the Harvard Kennedy School who last year completed a six-year stint as director of the nonpartisan Congressional Budget Office.

The federal budget is on an unsustainable trajectory.

Louise Sheiner, Brookings Institution economist

That new dawning reality creates a “sea change,” Elmendorf says, for making tax and spending decisions meaning, less pressure. It’s just like buying a car or house: If interest rates are low, you can borrow more and buy more. Of course, you still have to pay it back, or, in this case, taxpayers will have to at some point in the future. And that’s the key stumbling block: The results would be felt by millennials and their descendants. “The federal budget is on an unsustainable trajectory,” warns Brookings Institution economist Louise Sheiner, reflecting a view that most economists seem to agree on.

Indeed, the national debt, at 75 percent of gross domestic product, is the highest it’s been since World War II, and it’s projected by the CBO to hit over 120 percent by 2040 … and then keep going, unless something changes. The unfunded obligations of Medicare and Social Security, at $72 trillion, are roughly four times the current annual GDP and five times the national debt, points out University of California, Berkeley, economist Alan Auerbach. The debt will continue to go up as spending balloons to accommodate the promised retirement and medical needs of aging baby boomers.

Eventually, taxes will have to go up, or benefits fall, to avoid choking off the economy. Yet with low interest rates, many economists believe, those painful measures might be delayed or introduced more gradually. That’s the key finding of a paper that Sheiner and Elmendorf jointly authored and recently presented at Brookings’ conference. Still, it boils down to generational warfare, volume 2016. Do you raise taxes and cut spending now, so future generations won’t bear as big a burden? Or do you phase in the changes gradually enough that a (presumably) growing economy makes a bigger burden easier to bear in the future, or at least harder to see?

It gets more complicated. After all, almost no one predicted today’s super low interest rates so there’s little reason to be confident about low-rate predictions for the future. While it’s cheaper for Uncle Sam to borrow and spend, it’s much harder for big pension funds, or even ordinary savers, to meet retirement needs, essentially enriching borrowers at the expense of savers. And procrastination might be just too easy, Auerbach says.

Some have even bleaker views. Laurence Kotlikoff, economist at Boston University, argues that the U.S. is essentially as bankrupt as Russia, with huge obligations it can never meet, but it just skates along borrowing more money. Since someone in the future will have to pay back what the government spends with borrowed money, Kotlikoff says, “it’s not like this is a free ride.” Borrowing and printing money, he figures, is a subtle form of taxation, a way to redistribute wealth at least in part between generations.

For now, it looks like baby boomers will get to skip paying the interest-rate portion of any spending tab, just like drivers in those new Buick Enclaves. But as for Gens X, Y, Z and others not yet born? Likely not so lucky.

Comment

OZYFast Forward

New trends and breakthrough thinking in politics, science, technology, business and culture. It’s futurism at its best.