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June 23, 2021, 9:46 a.m. EDT

Beware America’s soaring public debt

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Michael J. Boskin

STANFORD, Calif. ( Project Syndicate )—America needs to rein in its soaring national debt. But President Joe Biden seems eager to do just the opposite. The risks are too big to be ignored.

In the aftermath of the 2008 financial crisis, President Barack Obama ran the largest budget deficits of any president since World War II (adjusting for the automatic revenue and outlay effects of the business cycle). His successor, Donald Trump, surpassed him.

Biden plans to top them both. Though America’s gross federal debt now stands at 107% of gross domestic product —a post-WWII record—the Biden administration’s 2022 budget has the country running by far the largest-ever peacetime deficits.

Persistently large deficits

To be sure, I support policies to mitigate the short-run economic pain caused by a crisis like the COVID-19 pandemic and help spur recovery, as long as the long-run cost is reasonable. But Biden’s spending plans don’t meet that condition. Instead, they would create huge deficits that persist long after the economy is back to full employment.

For the five fiscal years from 2022 to 2026, the Biden administration would run deficits of 5.9% of GDP, on average. That level was reached only once between 1947 and 2008—in 1983, when the unemployment rate averaged above 10%. But the administration’s projections put unemployment at 4.1% in 2022 and 3.8% from 2023 and onward.

Biden claims his proposals will add only modestly to the public debt (which is set to grow anyway, owing primarily to ever-rising expenditure on Social Security and Medicare). But there are good reasons to believe otherwise.

For starters, the Biden administration hopes to offset higher spending by increasing corporate and capital-gains taxes. But these tax hikes are unlikely to pass an evenly divided U.S. Senate as proposed. Moreover, such taxes are particularly harmful to growth , so if some version of them is enacted, the Biden administration will likely find that its revenue projections were overly optimistic.

Biden’s spending proposals also include several expensive entitlements, such as improved home care for the elderly and people with disabilities, universal free preschool, and two years of free community college for young adults. History suggests that such programs are likely to become permanent, with costs that grow far in excess of projections.

Meanwhile, even as China and Russia build up their militaries, Biden has placed a lower priority on defense spending, with an increase that does not keep up with inflation. Under his administration’s budget, defense spending will fall to its lowest share of GDP since before WWII.

Breaking news: Biden ‘encouraged’ by ongoing talks on bipartisan infrastructure plan, White House says

No free lunch

Some argue that the U.S. has nothing to worry about. Deficits supposedly don’t much matter when an economy borrows in its own currency; the Federal Reserve just needs to buy up the debt from the Treasury. And with government-borrowing rates lower than the projected growth rate, the debt can be rolled over forever. Deficit finance becomes a “free lunch.”

These claims merit considerable skepticism. The reasons why are highlighted in recent technical papers by me , my Hoover Institution colleague, John Cochrane , Greg Mankiw and Laurence Ball (of Harvard University and Johns Hopkins University, respectively), and Boston University’s Larry Kotlikoff , along with his co-authors .

Historically, huge debt buildups have usually been followed by serious problems: sluggish growth, an uptick in inflation, a financial crisis , or all of them. We cannot be certain which problems will occur or what debt-to-GDP ratio will signal trouble for which countries. And the U.S. does have the advantage of issuing the world’s leading reserve currency. But inflation risks are rising—a trend that more deficit-financed spending will only accelerate.

Higher debt also increases the temptation to stoke inflation, particularly if foreigners hold a large share of it. The grossly simplistic assumption that debtors are rich and creditors are poor is likely to reinforce this temptation, especially in a political climate where many politicians and voters support tax and other policies that target the wealthy.

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