American exceptionalism has meant many things over the years, often referring to our spirit and commitment to individual liberty.
Today it could refer to our exceptional fiscal recklessness.
In its newly released April 2018 Fiscal Monitor, the International Monetary Fund projected that the United States is the only — yes, only — advanced economy in the world expected to have its debt burden get worse over the next five years.
Every other rich country, including perennial fiscal basket cases such as Greece and Italy, is projected to lower its debt as a share of its economy. That is thanks in large part to the global economic recovery, which is bringing in more tax revenue and reducing the need for expensive automatic stabilizers such as unemployment benefits.
Here in the United States, though, we’ve taken our economic recovery and squandered it.
In December, Republicans passed massive, top-heavy tax cuts; this year, Congress oversaw a run-up in new spending. The result: trillion-dollar annual deficits as far as the eye can see.
In fact, within a decade, our debt-to-GDP ratio will be at its highest level since 1946. That year, of course, we had good reason for loading up on debt: We had just fought World War II. Today, with unemployment at an 18-year low and the country enjoying one of the longest recoveries on record, it is difficult to explain why we’ve spilled so much red ink.
Which is exactly why economists and international institutions have been advising the United States not to fritter away this opportunity to get our fiscal house in order.
“Because growth is good, we say, ‘When the sun is shining, please fix the roof,’” IMF Managing Director Christine Lagarde told me during an interview last month. “Build buffers, use your fiscal space to actually do the structural reforms that will improve your overall productivity and your capacity to resist” economic challenges.
Instead of taking this advice, Republican leadership is now eyeing even more deficit-financed tax cuts.
This week, outgoing House Speaker Paul Ryan said the House planned to make permanent the individual tax cuts currently set to expire in 2025. This would add trillions of dollars to long-term deficits.
Trump administration officials have likewise expressed interest in more and different tax cuts, including on capital gains. This would make the existing GOP tax overhaul even more plutocratic, since households making more than $1 million account for about two-thirds of all capital-gains income, according to the IRS.
This type of behavior has sometimes earned fiscal scolding along the lines of: Households have to spend within their means; why can’t the feds? Such criticisms are misguided. Governments are not, in fact, like households, and deficits are not a moral issue. But running up our debt, especially at the current moment, does have economic consequences.
First and foremost, it means we will have less room to maneuver when — not if — we next have a recession and actually need to stimulate the economy.
Second, as the economy recovers, interest rates will continue to rise. Which means our already enormous debt burden will become increasingly expensive — and force us to cut funds for things we’d much prefer to spend money on. In its recent budget outlook, the Congressional Budget Office estimated that under existing law, we’ll spend more on interest than on our entire military by 2023.
And third, in the long run, high government-debt levels are bad for growth.
That’s because government debt can crowd out private investment; there is a finite amount of capital out there, and the more that is drawn to U.S. Treasury, the less there is available for entrepreneurs and private businesses.
In other words, we’re mortgaging our future. And for what? Not investments in things that might actually pay off, such as infrastructure or human-capital development, but tax cuts for the rich. This is not how a big-boy country, the richest and most economically sophisticated in the world, is supposed to behave.
In fact, we’re making the very same policy mistakes that we — and international institutions — have historically admonished poorer, less economically advanced countries for committing. Up to and including silly protectionist measures that will make our own consumers and businesses worse off.
“I used to work at the IMF where we, for emerging markets, would ask questions such as who is going to buy the government debt and what will the currency implications be and how much faith does the rest of the world have in the ability of this country to pay back their debt,” says Torsten Slok, the chief international economist at Deutsche Bank.
“Now,” he says, “I’m getting the same questions from investors about the United States.”