Even before the presidential election turned into one long stream of sexual assault allegations and denials, Donald Trump and Hillary Clinton focused their campaigns more on personal attacks than policy differences. While trade, immigration and jobs have on occasion become subjects of debate on the campaign trail, some important issues are receiving short shrift. Although Clinton campaigned with Al Gore last week and pledged to not raise the national debt by a penny, and Trump sometimes mentions the size of the debt, useful discussion of climate change and federal government’s unsustainable finances has been limited.
That will change a bit this week as debt and entitlements are scheduled to be the topics for a 15-minute segment of the third presidential debate on Wednesday. But climate change isn’t on the agenda, and the relative lack of discussion around both subjects is an indication of the shortsightedness that plagues our political system.
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As issues, the debt and climate change are usually emphasized by opposite sides of the political divide, but they have much in common. Properly understood, climate change and the debt are long-term issues. It is extremely unlikely that coastal cities will be submerged or that the federal government will face a sovereign debt crisis in the next few years, but the risks from greenhouse gas emissions and deficit spending grow over time. Clearly, there is some limit to the amount of carbon dioxide we can pump into the environment and the amount of unfunded commitments Congress can make before something terrible happens. But because that something terrible is likely far in the future, it is difficult to get politicians and the public to focus on these issues.
Climate change activists and deficit hawks are united by a concern for long-term sustainability. The fundamental question that drives these advocates is, “What kind of world are we leaving for our children and our grandchildren?” If we pollute too much and borrow too much, their lives may be worse than ours — and that seems morally repugnant. Surely, the generation that currently holds power should display good stewardship and not damage the planet or federal finances in a way that makes life difficult for those who follow us.
Advocates too often deal with the lack of immediacy of these problems by exaggerating them. For example, some climate change activists ascribe extreme weather events to human greenhouse gas emissions, without being able to prove a connection. We have records of severe storms, floods, droughts and temperature extremes going back hundreds and even thousands of years. Yet these events occurred before humans generated a significant amount of greenhouse gases, so clearly we will experience weather extremes under any climate change policy (or none at all).
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Also, some amount of global warming is not bad for everyone. Agricultural regions far north and south of the equator will enjoy longer growing seasons, and fewer people will perish during cold snaps.
Excessively dire predictions, exaggerations of the scientific evidence, and demonization of those who question climate change orthodoxy undermine support for the basic truth that we cannot generate an unlimited amount of carbon dioxide. Rather than impose drastic restrictions that stifle the economy and destroy jobs, we can deter emissions by requiring emitters to pay a price for the greenhouse gases they generate — a policy embraced by some Republicans before global warming became a partisan issue.
Deficit hawks have frequently issued forecasts erring on the side of pessimism. Earlier in the decade, some were predicting a U.S. sovereign debt crisis in 2016, riots in the streets and that interest on the national debt would exceed $1 trillion annually by 2020.
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Grim fiscal forecasts are often based on the questionable assumption that interest rates will rise back to late 20th century levels. For example, the $1 trillion interest cost figure assumes $20 trillion in debt at an average rate of 5 percent. But expectations that interest rates will return to this level have been consistently dashed. The secular downturn in interest rates that started in 1982 persists today. And, we have now had eight years of ultra-low interest rates without major price inflation.
If and when interest rates start to rise, it will take many years for the average rate paid by the federal government to reach 5 percent; currently the rate is just 2.24 percent. Trillions of dollars in debt is now locked in at ultralow rates for five, 10 and even 30 years; so even if newly issued federal debt reaches the 5 percent average, the composite rate on the entire stock of federal debt will remain lower than that.
Also, further declines in interest rates are possible, especially since our rates are higher than those in Europe and Japan. A number of our advanced economy peers are seeing negative interest rates for terms of as long as 10 years. If a government can roll over short- and intermediate-term debt without having to pay interest, it is harder for that government to tip into a crisis.
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Harder, but not impossible. As I explain in a forthcoming study for the Reason Foundation, U.S. federal entitlements are unsustainable. Eligibility ages for big-ticket federal entitlements are currently fixed at 65 for Medicare and 67 for Social Security (after 2027). Yet life expectancy continues to rise each year, and we should assume that this trend will persist.
As a result, the dependency ratio (the number of beneficiaries divided by the number of workers paying payroll taxes) will continue to decline. Another megatrend that federal entitlements were not designed to handle is the growth of health care costs. Assuming this trend stays in place as it has for a half century, government health care entitlements will grow as a percentage of GDP until eventually reaching some breaking point.
With low interest rates, the federal government can fund rising entitlement costs for an extended period of time. But at some point the demand for borrowed funds will exceed the amount available from investors, forcing interest rates higher. If the government continues to run huge deficits, it will eventually be compelled to default or to print large enough volumes of money to trigger hyperinflation. Either event would be awful, as we saw recently in Greece and in 1920s Germany.
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It is impossible to predict how long it will take to reach such an impasse. It could be decades or even centuries. Still, proper fiscal stewardship requires that we don’t tempt fate in this way. We can take advantage of the breathing space afforded by low interest rates to phase in reforms gradually, but we should begin phasing them in sooner rather than later. These reforms include indexing the eligibility age for federal entitlements to longevity and limiting the growth of health care costs by encouraging more competition between drug companies, insurers and other providers.
Concern about climate change and the long-term debt are both reasonable. They are born of a desire to pass along the blessings we enjoy to the generations that follow. Elevating both issues on the political agenda is difficult because something else always seems to be more pressing. Advocates of both causes should consider joining forces to support a united sustainability agenda that seeks more modest reforms.
