Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

November 12, 2004

Deficits Forever?

In May 2001 the Congressional Budget Office forecasted a $400 billion federal budget surplus for fiscal year 2004.  The actual outcome was a deficit of $413 billion.  That’s an $813 billion error.  Sometimes economic forecasters make the weather people look good.

What happened?  Just about everything.  The economy turned south, with capital gains swings making the revenue impact especially severe.  And of the $426 billion shortfall in revenue from projections, about half was due to tax cuts.  The war and a pork barrel spending frenzy by Congress pushed spending $287 billion higher than expected. 

As a result, deficits are expected to remain with us for a long time to come.  The Bush administration’s promise to cut deficits in half by 2008 seems timid, yet it may prove optimistic.  The costs of nation-building in Iraq and Afghanistan, not to mention renewed efforts to extend tax cuts and fund homeland security, will work against whatever healing in revenues occurs through economic growth, unless some new spending discipline emerges.

But there seems to be little prospect of that.  We have a new generation of elected representatives in our legislatures who passionately believe that tax cuts will pay for themselves.  But passion has nothing to do with it.  The question of how much the economy – and the tax base – responds to lowered tax rates is fundamentally an empirical question.  And at the national level the data have always told us that it doesn’t respond enough to make the revenue loss from lowering rates go away.

Certainly the dollar’s precipitous fall in the days following the Republican gains in Washington should serve as an important reminder that deficits do, indeed, matter.  The foreign investors who help make our economy run – to tune of about $3 billion a day, when trade deficits are included – are increasingly less interested in holding a currency whose fiscal house is in such disorder.

But a little perspective reveals that these deficits are not what we should really be worried about.  As a percentage of the output of the economy, federal deficits are lower than they were in the 1991 recession, and lower than countries like Germany today.  The real problem comes as the baby boom retires, and the promises of Medicare and Social Security come due.

These obligations are kept off the books by the same governments that lecture companies on their own accounting transparencies, and they are truly staggering.  By some projections, the borrowing rates necessitated to pay these open-ended entitlements could bring government debt to 150 percent of GDP by the year 2050, compared to 50 percent today.

At least for Social Security, there may be a light at the end of the tunnel.  Sensible solutions to the inherent flaws in a program that promises much in the future, but sets aside almost nothing today, have begun to emerge.  There is a sense among at least some in the electorate that the system cannot go forward as it is today.

But the bomb that will explode first if we do not act is Medicare, and here we are acting to make the crisis worse.  Faced with exploding utilization and costs of health care that are in part provoked by a system that removes price from the purchase decision, our elected leaders have rushed to bring even more expenditures under the shaky tent.

Given the tough decisions looming just ahead on all these issues, maybe the Republicans won’t be as overjoyed over their political victories next year as they appear to be today.

Link to this commentary: https://commentaries.cberdata.org/294/deficits-forever

Tags: finance


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. 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. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close