How Afraid Should We Be of the Debt?

This morning I attended an event with the Peterson-Pew Commission on Budget Reform. An all-star lineup of panelists, from the CBO to the Federal Reserve, discussed the federal debt and how we should start to bring it under control after the recession.

Most of the event was head-nodding. The panelists broadly agreed that mounting federal debt was a looming crisis. They broadly agreed that the main drivers were growing entitlements and tax receipts that failed to pay for guaranteed spending. They broadly agreed that the solution to this crisis involved specifying a target number for our debt-to-GDP ratio and making a credible plan to hit that figure by a certain year.

And they broadly agreed that the White House and Congress did not appear to have any sort of clue how to talk about the problem.

To be sure, there isn't much good in scaring people about the deficit right away. Deficit spending today is both easy -- short term interest rates are zilch and 10-year Treasuries are at a very low 3.6% -- and necessary, since counter-cyclical spending is required to understudy for weak private demand in our economy. Obama came into office with a $1.2 trillion deficit, and unemployment is supposed to average 10 percent in 2010, according to the Council of Economic Advisers. With tax receipts decimated and private sector earnings falling, this year's deficit should be big.

But if trillion-dollar deficits are a necessary, foul-tasting medicine for the weak economy today, they're downright poison for the economy in the long run. This creates a challenge for the administration. On the one hand, Obama can defend his budget, which is predicated on deficit spending. On the other hand, to ready Americans for the tough choices ahead, he can raise fears about our long-term debt ... which is also predicated on deficit spending. Doing both at the same time is bound to confuse people, and sure enough, when Obama last took on the issue of deficit spending, it was pretty confusing, to me!

In his speech defending the 2011 budget, Obama said "Families across the country are tightening their belts and making tough decisions. The federal government should do the same." That's not right. If families across the country are tightening their belts because dad lost his job, the government will spend more on unemployment insurance to the keep the family afloat. When jobless dads and moms across the country find work and their belts get bigger, the federal government will spend less. If we're going to teach Americans about deficits and spending, let's start with better metaphorical parallels: Families and the feds should never tighten belts together.

Large deficits should be thought of less like synchronized pantaloon-upkeep and more like a serious pain killer. After major surgery, doctors prescribe Vicodin because otherwise the pain could be unbearable. But the Vicodin supply is limited to a pill bottle, and it doesn't come with the option to refill infinitely. In fact subsisting on Vicodin after the pain should have subsided is generally considered disreputable. So there's your metaphor. Trillion-dollar deficits are like pain killers: occasionally necessary, even desirable, but only in doses.

The central question then isn't merely "How afraid should we be of the debt?" but "How should we be afraid of the debt?" We should not fear a limited, prescribed dose of serious deficits. We should fear addiction. Be afraid, America. Be very afraid. Just not yet.