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April 3, 2006

Getting Realistic About Deficits

It’s time we put the rhetoric and dogma on the shelf and get realistic – and tough – on the topic of the Federal government deficit.  The elected and the electorate alike have been floating around in a kind of never-never land for most of this decade, engaged in the dangerous fantasy that deficits don’t matter simply because we haven’t hit any icebergs yet.

The idea that a robust economy, almost five years past its last recession, should have a government that spends $400 billion more than it can pay for is preposterous – yet that is what we have.  In fact, since 1965 Federal Government spending has averaged about 20.5 percent of Gross Domestic Product, but revenues have only covered to 18.2 percent. 

The rest has been financed, through sale of government bonds, which are increasingly held outside the country.  Almost one year ago, the fraction of outstanding government debt held by foreigners rose above 50 percent for the first time.  Why does this matter?  As long as foreign banks, governments, and individuals share our keen interest in the U.S. economy’s stability and growth, it probably doesn’t.  But should their interests diverge from ours in the future, it could be very costly.

The only exception to this spendthrift pattern was in the 1990’s, when the gap between spending and revenues vanished and a small surplus briefly flourished.  This was an era of what might be called “good” gridlock in government, when two-fisted spending plans on ambitious health care commitments were stymied by the division between the White House and Congress, and a one-time event – the rollback in defense spending after the end of the Cold War – took spending down to a thirty-year low of just over 18 percent of GDP in 2000.

Now we live in an era of “bad” gridlock, where serious action must be taken to restore fiscal sanity in Washington, but no one is stepping up to the plate.   The best the Bush administration can offer is a promise to cut the deficit in half in the next four years.

That’s a reasonable start, but it dodges some big issues.  The baseline projection made by the Congressional Budget Office incorporates the expiration of the tax cuts made in the President’s first term.  They also project no change to the badly designed Alternative Minimum Tax provisions of the tax code that will begin ratcheting up the tax burden of middle class families in the near future.  If the tax cuts are extended, if the AMT problem is fixed, and if defense spending growth continues on trend, there is strong possibility that the deficit could be worse, not better, in the coming years.

Then there is the entitlement monster to worry about.  By the year 2030, just three programs – Social Security, Medicare, and Medicaid – will account for 18 percent of GDP.  That’s all the tax revenue we collect, leaving nothing left over for interest on debt, defense, highways, or anything else.

How do we get started on making a dent in this problem?  I would begin by doing two things:  confronting the facts, and changing the rules.  The facts are simple – we can’t keep going as we have been.  The fixes will involve more taxes and less spending.  The decisions will result in many of us – most of us, in fact – coming out as losers.  And the sooner we get started, the less pain and injustice, depending on your point of view, will be needed.

Changing the rules is also long overdue, if harder to accomplish.  Clearly we should have the same kind of transparency in government accounting that government insists on for the private sector.  Sunset provisions for agencies and programs, as well as periodic renewal of all spending commitments, and an effective line-item veto are a few more ideas with teeth that could help.

But the real answer is to do the heavy lifting of bringing spending plans back down to reality.  And there isn’t a leader in sight who’s prepared to do that.

Link to this commentary: https://commentaries.cberdata.org/224/getting-realistic-about-deficits

Tags: economic recovery, economic development


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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