Criticism that this year’s presidential candidates are ignoring the national debt is at least half-misplaced. Donald Trump’s approach to this — and all other issues — is unserious, of course. But Hillary Clinton has taken a perfectly reasonable approach — one without the unwarranted concern that debt is crowding out other policy priorities. She is not whipping up fears about deficits that are unsupported by economic data. She is proposing that her new, permanent spending plans be matched with progressive revenue increases.
These are reality-based stances. The only change I’d urge is to rely more heavily on deficit financing for proposed infrastructure investments.
Clinton summarized her views on using progressive tax increases to pay for new, permanent spending (like investments in early childcare and education) in a recent interview with Vox : “I have put forth ways of paying for all the investments that I make, because we do have the entitlement issues out there that we can’t ignore … and I think we can pay for what we need to do through raising taxes on the wealthy.”
Critics might say that paying for new proposals isn’t enough and that even current fiscal policy is unsustainable. But the Congressional Budget Office projects that this year’s deficit will be under 3 percent of total gross domestic product, a level consistent with a stable debt-to-GDP ratio. Further, recent years have seen a rapid deceleration in health care costs, the largest drivers of long-run projected deficits by far. Bond markets sure don’t seem worried about U.S. fiscal sustainability, with long-term Treasury interest rates at historic lows.
The CBO does project that by 2026 this deficit will rise to 4.9 percent of GDP, but this projected increase is not driven by new programs or tax cuts or existing programs ramping up in cost. Instead, it is entirely driven by CBO’s forecast that interest rates paid on existing debt will rise sharply and soon. This interest rate forecast is in turn driven by the projection that full employment will be reached soon and will persist. But the assumption that a full recovery — and the higher interest rates it might bring — is right around the corner has been a feature of CBO projections since the Great Recession began. Such projections have not only consistently disappointed, but also have just as consistently driven premature calls for deficit reduction.
One way to ensure the ever-forecasted recovery actually arrives is through a burst of infrastructure investment — investment the country clearly needs. Clinton has called for an ambitious program. But, differing from her approach, I think that these investments should be deficit-financed, not paid for with new tax increases. It is smart to use debt to finance long-lasting investments that will give future economic returns. It is even smarter to do this when inflation-adjusted, long-term interest rates are nearly negative.
Clinton has admirably recognized that the real-world data signal that near-term deficit reduction is not the most pressing current policy priority, yet she has also clearly shown respect for fiscal realities in calling for new permanent spending to be matched with new revenue. She now should just accept the free lunch of borrowing to undertake a burst of infrastructure investment.
Josh Bivens is a Ph.D. economist and is the research and policy director of the Economic Policy Institute.