I suspect that a target of zero deficit in 2040 will work. Here’s why: The problem we’re running into right now is that the deficit is projected to increase faster than economic growth, forever. Obviously, that can’t work and the currency markets will punish us for that if current policy becomes set in stone.
The dirty little secret here is that it is arithmetically possible to run a deficit forever, as long as the percent deficit is on average less than GDP growth on average. What Ryan’s plan does is to get the deficit down below GDP growth quick enough to satisfy the bond markets that our debt will be paid.
And, strictly speaking, that’s all that is necessary.
In normal times, this is absolutely true. Problem is, we’re not in normal times. In fact, the federal government of the United States of America is sitting on top of the world’s biggest adjustable rate mortgage — and the payments are set to radically increase.
Let me explain.
Historically, Washington financed most of its debt by selling 30-year Treasuries. But then a couple things happened during the Naughts:
• The Fed dropped interest rates to record lows, to keep the economy juiced in the aftermath of 9/11.
• The Bush administration began financing the debt with two-year and three-year Treasuries, to take advantage of those low interest rates. And, not coincidentally, to mask the true size of its spending problem.
As a result, we ran up the total debt to $10,000,000,000,000. But our interest payments — the mortgage payments, if you will — didn’t bust the budget, thanks to low rates on short terms.
Then the financial crisis of 2008 hit, caused in no small part by all that cheap debt made available by the Fed. Unemployment payouts skyrocketed. Tax revenues plummeted. The Obama/Reid/Pelosi “stimulus” added another near-trillion in debt, in one fell swoop.
Our “unsustainable” and “unpatriotic” borrowing soared from a measly couple hundred billion (“Hey, no problem, man — I can cover that in my sleep!”) to almost two trillion dollars in 2009 alone. That’s a two followed by twelve zeroes, like this: $2,000,000,000,000. And the next two years weren’t much better.
As an aside, the spending problem in 2009-2010 was even worse than it appears at first glance. Democrats love to remind you that Bush’s last deficit was $1.4 trillion — not much less than President Obama’s record $1.8 trillion the next year. However, Bush’s number includes $700 billion (half the total) in emergency TARP funds — most of which were paid back over the next two years. In other words, TARP shows up as an expense in Bush’s final budget, but the paybacks show up as income in Obama’s first two budgets. TARP made Bush’s spending problem look worse than it actually was, and it masked just how awful Obama’s spending problem was and is.