Soundoff: Debt debate is completely unnecessary

Everyone says it’s tough to find common ground between Democrats and Republicans today in Washington, but when it comes to the national debt the leaders of both parties basically stand shoulder to shoulder. They may not agree on exactly how to do it, but everyone from the Tea Party Caucus to President Obama seems to think we need a big debt reduction deal and we need it right now.

The argument of the deficit hawks is quite simple. If we continue spending as we do today—especially on social insurance programs like Medicare, Medicaid and Social Security—our borrowing costs will rise sharply. By the mid 2020s, the most severe alarmists claim, we could see interest rates on our debt high enough to doom us to a financial Armageddon of Greek proportions. It will simply be too expensive for us to borrow money to finance social programs and the military, and so the government will enact either crippling austerity measures or face default.

Curiously, the deficit hawk solution to such debt problems seems to mirror one of their dreaded consequences: they argue for harsh austerity now to avoid it later. Problem is, cutting federal spending now is likely to do more to increase unemployment and tamper growth than it does to alleviate the deficit.

Already we’re beginning to see the consequences of austerity on the federal level. A cut in federal spending late last year precipitated a GDP contraction of .01 percent in the final quarter of 2012, the first time the economy has failed to grow since it sputtered back into positive territory in the third quarter of 2009. It’s also been widely noted that cutbacks on the state and local level over the past four years have hampered the recovery and cost at least a million jobs.

If you’re still not convinced, consider the terror the sequester strikes into the hearts of beltway Democrats and Republicans alike. Another bipartisan consensus emerges: everyone knows the cuts would push us back into recession. And yet, we continue to think the problem is the type of austerity, rather than austerity itself.

What’s more troubling is that the entire premise of the deficit hawk argument is a farce, at least in the short term. American treasury bonds are trading at essentially negative real interest rates—meaning it’s historically never been cheaper for us to finance a deficit. If the hawks are right about the need to cut spending now, they need to offer a comprehensive account of why the riskiness of American treasuries is not priced into their values.

If there’s such a consensus among economists and finance wizards that the deficit is to become unsustainable within the next two decades, it’s mind-boggling that the markets would allow us to keep borrowing like nothing is wrong. Maybe investors simply have confidence we will enact a major debt reduction package before things get out of hand, but that seems highly unlikely given all of the business interest bellyaching about the economic uncertainty instilled by unpredictable federal budget negotiations. Then there’s always the fact that credit rating agency Standard and Poors removed the U.S. from its list of risk free borrowers in August 2011—not usually a move that inspires confidence, but we borrow cheaply all the same.

Now, it could be that the market for American treasuries is just dysfunctional and the supposedly rational actors that comprise it aren’t properly valuing risk, but that opens up the deficit hawks to a critique of international finance markets they usually don’t want to take on. Instead, they point to the dollar’s role as the world’s reserve currency. In a world denominated in American money, raising U.S. borrowing costs would completely freeze international credit markets in a similar fashion to what we observed shortly after the financial collapse of 2008. That’s in no one’s interest, so there’s a universal incentive to keep the interest rate on American debt low.

What’s more, American treasuries are seen as a safe haven today for investors wary of the European debt crisis and the continent’s resurgent recession, as well as Asian economies like China that show signs of slowdown. As long as the American economic recovery continues to gather steam and inspire confidence in investors, there’s no reason to believe our borrowing costs are going to rise, especially because a growing economy will beget higher tax receipts and less reliance on public assistance programs, lowering the debt (indeed, many economists point to the great recession as the real reason we have alleged debt issues anyway—not overspending).

In that vein, it makes absolutely no sense to cut spending now. Doing so would only hurt growth, thereby increasing the debt and inspiring more pressure on our borrowing costs than if we just left well enough alone. Of course, there are long-term structural issues in our social insurance programs like Medicare and Medicaid that need to be addressed,  but administering any cuts before unemployment dips at least below 6 percent is tantamount to economic lunacy.

Unfortunately, there’s no one more loony than most strident deficit hawks in the halls of Congress. As The Washington Post’s Brad Plumer noted after the “fiscal cliff” deal, the U.S. is now slated to endure European-levels of austerity in 2013—cuts that amount to around 1.9 percent of GDP—even while we continue to borrow at record low rates. Perhaps our lawmakers should be worried about turning into Greece after all—not in terms of our debt, but in terms of economic growth and prosperity.