In terms of the fiscal deficit, the minimal acceptable anchor for fiscal policy should be the following: You need to reduce the deficit to a level where the debt stops growing as a share of the economy and can start to come down. And for a country like the United States, that means we have to have a deficit that’s slightly below 3 percent of GDP, and we have to hold it over that level. You know, we’re slightly above 8 percent of GDP now. We have to bring it down slightly below 3. And we have to do that in a timeframe whereby the debt stabilizes at a level that’s acceptable and stops coming down.
So, again, if you look at the path we’ve laid out for the country on CBO’s metrics, metrics scoring, the President’s policies would reduce the deficit to below 3 percent of GDP in, I think, 2016, hold it there over the rest of the decade. And what that means is that debt held by the public would stabilize in the 70s — 70 percent range as a share of GDP, high 70s, and then gradually start to come down over time. Now, if we were to do that, and to achieve that, that would be a very consequential step.
The Geithner Rule on the U.S. budget is, simply, to stabilize debt around current levels and then gradually reduce it. And, indeed, President Obama’s recent budget would do at least the first part, according to the White House:
Two problems here, however:
1. Not only might the Obama budget not stabilize the debt, it certainly does not bring it down over time. Even at Brookings, Geithner conceded that the Obama budget “would still leave us, in the outer decades, with what are still unsustainable rates of growth in healthcare spending for retirees, where we’ve made some significant steps, in the Affordable Care Act, to bring down the rate of growth in cost. But, obviously, we’ll have to do more over time.”
And recall what Geithner told Paul Ryan at a recent House Budget Committee hearing: “We’re not coming before you to say we have a definitive solution to that long-term problem. What we do know is we don’t like yours.”
Then there is this chart from the White House, which shows debt exploding after the 10-year budget window:
2. Geithner assumes debt reduction doesn’t need to happen anytime soon. As he said later during his speech, “And, again, that’s why I think the right way to think about the fiscal challenges ahead is, first, put that in perspective. Don’t put it ahead of everything else we face.” He had better be right. The Congressional Budget Office estimates that 1 percent higher interest rates each year could increase deficits by $1.3 trillion over ten years. Geithner’s statement is also interesting in that it reveals the Obama administration doesn’t think debt or the size of government impedes growth.
OK, here is the real Geithner Rule: Let someone else worry about the debt.