Reducing the federal budget deficit has become priority #1 in our political system. Not jobs or the fragile economy or Wall Street reform or any of our other looming problems. Deficits. One way or another, by the end of the summer a deal will be in place to slash spending brutally and raise taxes slightly, all in the name of fiscal probity.
Fine. Let’s talk about deficit reduction. But, let’s do it in a way that sheds light on what the real choices are and their consequences. Who really will sacrifice? Who should? What should guide our choices?
(Other than raw blackmail of course. I just don’t know what to say about the hostage taking over the deficit ceiling. Nothing so reckless has ever been done in all of American history. Failure to raise the ceiling could cause a huge recession, an immediate cut in federal spending of 44%, force cuts in either programs for seniors or war spending, and damage the country’s credit rating for years to come. Worse, winning this round of blackmail ensures that the blackmail will be repeated, over and over.)
(Further, you all know that the political debate has nothing to do with the deficit, right? If it were, the Republicans would not have supported every single Bush tax cut and spending addition during 2001-08. N or would they still be demanding more huge tax cuts for the wealthy and. For example, the House GOP [Ryan] budget plan would cut social spending by something like $2.4 trillion and give it ALL back as tax cuts for the rich, by ending the estate tax, capital gains taxes, etc. The Ryan plan would not balance the federal budget for 60 years. This debate is and always has been about the size of government and who government should be in the business of helping. That’s a great debate to have, but since the public doesn’t know we’re having it, they aren’t really participating.)
Okay, okay, back to Thursday. I’ll open with some facts on:
- How big a problem deficits really are. Liberals – they are a real problem and we
will always be playing defense until they are brought under control.
- What’s causing these deficits in the short run and the long run. Conservatives – This is the part you won’t like.
- The moral dimensions of different ways to reduce government debt. Deficit reduction is NOT just about the math; It’s about what kind of country we’re going to be in the next century and what kind of…wait for it…social contract we’re going to have.
Here’s background on some of this. It’s just two charts.
HOW BIG IS THE DEFICIT PROBLEM?
Annual federal deficits are very large now, as is the accumulated debt from past deficits. Annual deficits are running above 10% of GDP –which is large – and total debt is around 100% of GDP, a level not seen since WWII. Also, Forty-two states face fiscal shortfalls this year, and, since they can’t borrow the difference like the federal government can, they’re slashing spending left and right.
But, the interesting part is what has caused these deficits.
WHAT CAUSED THE BIG DEFICITS?
It’s not rocket science, really. Cutting taxes repeatedly in the midst of two wars, adding an expensive prescription drug benefit to Medicare, and the effects of the biggest recession since WWII have pretty much done the trick, as the chart below shows.
Notice that, without the recession, the Bush tax cuts, and the extra spending, we would still have a federal deficit (the grey area). But, it would be flat as a percentage of GDP;
i.e., as compared to our nation’s ability to afford to pay it off. For more details, see this article.
State budget shortfalls are mainly the result of the recession’s lower tax revenues and higher social spending. But, some states, including California, have such out of whack balance between taxes and spending that they have “structural” deficits. They drown in red ink even in good years.
Back to pissing off liberals. After about 2020, the causes of the deficit change. Why? The recession and the Bush wars wind down and end. What’s left? As the next chart shows, basically, it’s rising health care spending by Medicare and Medicaid.
Of course, the Bush tax cuts remain a cause of the deficits, and, as the Boomers retire, Social Security starts to contribute a little bit. But, in terms of spending, it’s liberal health care programs that do the long-term damage.
None of these facts I’ve mentioned are a secret or controversial. Our politicians know all of them.