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December 28, 2009

Reducing Deficit Imperative for National Prosperity

The end of this decade is as good a time as any to reflect upon what has passed. We’ve had wars in Afghanistan, Iraq, and the Horn of Africa – and, lest we forget, in New York, Pennsylvania and Virginia. We’ve had two recessions, three presidents, five congresses and ten BCS championship teams. Our population has risen, employment has risen, and personal income has risen. The average American family is, healthier, wealthier and hopefully wiser now than when the decade started.

However, to listen to political rhetoric today, you’d think we’ve been living in the darkest of ages. But as Flaubert tells us, it is the “ignorance of history that causes us to slander our own times.” The facts reveal that in terms of its length, unemployment, inflation and loss of production – the things that matter – the current recession ranks as only the third or fourth worst of the dozen post World War 2 recessions. It hasn’t been as bad as the early 1980s much less the Great Depression.

The end of a decade is also prime time for dwelling upon the next ten years. A year ago I’d have been very optimistic. The buzz surrounding the new administration indicated they’d pursue a quick, but large, $220 billion stimulus bill (which I supported). Like many voters I expected modest and rational changes to health care and environmental policy. I was mistaken.

The stimulus bill grew to almost $800 billion, which, together with the TARP legislation gave us the single largest one year increase in national debt in history (by any measure). As this article goes to press, the size effect of health care legislation is a mystery – not least to those who voted for it. Most estimates have it adding about $1,000,000,000,000 to the debt. Unlike earlier periods of high deficits we aren’t buying anything permanent like infrastructure. This deficit is not sustainable, the spending will not help our economy grow and the legislation before congress will only make the matter worse.

The real alarmists are wrong though; the US will not go bankrupt. We cannot – we own a mighty printing press. But, unless we begin to reduce our deficit we face very difficult times. Without immediate reductions sometime, probably no later than mid 2011, interest rates on US securities (the debt the Chinese hold) will rise, and inflation will re-emerge. Here again, the alarmists are wrong. We will not descend into spiraling double digit inflation. The Federal Reserve will not let this happen. They will simply raise interest rates, too slowly at first, then vigorously. We will then enter another recession, for which we are most unready.

This doesn’t have to be; but reducing a deficit will take a once a century shift in politics. Tax increases, no matter how onerous or targeted won’t be enough. Cuts to all discretionary spending won’t plug the budget hole. We will have to cut spending radically in defense, Medicaid and Medicare, aid to the poor, transportation and education. 2010 will be a pivotal year.

Link to this commentary: https://commentaries.cberdata.org/32/reducing-deficit-imperative-for-national-prosperity

Tags: stimulus, personal income and wealth


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. 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.

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