New York Times Editorial: The Truth About the Deficit

New York Times Editorial: The Truth About the Deficit
Copyright by The New York Times
Published: February 6, 2010
http://www.nytimes.com/2010/02/07/opinion/07sun1.html?th&emc=th


When the White House released its new budget last week, including more spending to create desperately needed jobs, Republican leaders in Congress denounced President Obama for driving up the deficit and demanded that the Democrats halt their “reckless” ways.

The deficit numbers — a projected $1.3 trillion in fiscal 2011 alone — are breathtaking. What is even more breathtaking is the Republicans’ cynical refusal to acknowledge that the country would never have gotten into so deep a hole if President George W. Bush and the Republican-led Congress had not spent years slashing taxes — mainly on the wealthy — and spending with far too little restraint. Unfortunately, the problem does not stop there.

The Republican amnesia and posturing are playing well on the hustings, where Americans are deeply anxious about the economy and fearful of losing their jobs and homes. Far too many Democratic lawmakers are losing their nerve.

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

None of this means that the politicians — from either party — are off the hook. They will soon need to make hard decisions about how to reduce the deficit. But more posturing and sniping is not going to make the economy better or solve the deficit problem. President Obama has called on the Republicans to join a bipartisan commission to help make those tough decisions, but they have been resistant to the proposal.

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We fear the demagoguing is not going to stop, especially with Congressional elections this November. As the budget debate plays out, here are some basic facts about the deficit that Americans need to consider:

HOW DID WE GET HERE? When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come.

By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 — two weeks before Mr. Obama was inaugurated — the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion.

About half of today’s huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit — all of which Republicans supported, virtually in lockstep.

The other half of recent deficits is due to the recession and the financial crisis.

To avoid a meltdown, the government — under President Bush and President Obama — rightly decided it had no choice but to spend hundreds of billions of dollars to bail out banks and car companies and to stimulate the economy. That prevented a very bad situation from becoming much worse, but as the recession dragged on, hundreds of billions in tax revenues have also dried up.

As for why the financial system and the economy imploded, President Bush and Congress deserve much of the blame for their devotion to debt-driven growth and blind deregulatory zeal — although on deregulation, President Clinton and his team (some of whom are back in the White House) were also complicit.

Were it not for those multiple calamities, budget deficits today would be negligible. That does not mean we would be off the hook. An aging population and relentlessly rising health care costs will hit the country with even deeper deficits as the baby boomers retire. Politicians need to pass health care reform now and start thinking seriously about Social Security and tax reform.

So what are the immediate fiscal lessons here? The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse.

WHAT CAN BE DONE NOW? Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

That is why when the banks and the economy began to crumble in 2008, President Bush responded with a $700 billion bank bailout and a $168 billion stimulus package. When Mr. Obama took office, the banks were still shaky and the economy was still plunging— as measured by real-life indicators like jobs, consumer spending, credit availability, home equity, retirement savings and business confidence. The new administration made the sound decision to continue the bailout and pushed a $787 billion stimulus through Congress, with very little Republican help.

The stimulus package slowed job losses and helped spur activity — in the third quarter of 2009, the economy grew at an annual rate of 2.2 percent, and the initial fourth-quarter reading was 5.7 percent, a rebound few thought possible a year ago.

Still, without a jobs revival to boost consumer spending and tax revenues — and with the states facing immense budget shortfalls — the economy is unlikely to do anything other than limp along, at best, once the effects of the stimulus fade this year.

In his recent budget, Mr. Obama proposed to spend $266 billion on tax credits for hiring and new job-creation investments, and on other short-term stimulus including extended unemployment compensation. That would improve on the House-passed $154 billion jobs bill. But in the Senate, Republicans are balking at the prospect of a big bill, saying they need to hold down the deficit. They have spooked the Democrats, who are now trying to negotiate what appears to be a far too modest bill in hopes of winning Republican support.

What they should be saying — and what the White House should be saying a lot louder — is that a prolonged downturn or a renewed recession would do far more damage to the budget than upfront deficit spending. In fact, a clear lesson from the Depression of the 1930s is that reducing deficits at a time of economic fragility undercuts recovery.

SO DO WE JUST LIVE WITH THE DEFICIT? The problem must be addressed. Persistently high deficits are harmful to the economy and the country’s long-run security.

If the government must keep borrowing to make up the difference, it could drive up interest rates and force private companies to compete with the government for investors. That, in turn, would reduce economic growth and, by extension, the potential earnings — and standard of living — of everyone.

The process is generally gradual. But it could be wrenching if creditors lose confidence that the government will ever put its fiscal house in order and suddenly decide to put their money elsewhere. That could lead to a fiscal crisis, with sharp spikes in interest rates and a rapidly depreciating currency.

There is no question that, over the next several decades, deficits and debt in the United States are headed for dangerously high levels. But today’s deficit fearmongers invariably fail to note that the impact of stimulus spending on the long-term fiscal problem is small, because the spending is temporary.

The real problem, which also goes unmentioned, is that dangerous deficits will accumulate over time if continuing trends and policies — especially in health care — persist unchanged.

SO HOW DO WE FIX IT? Mr. Obama’s budget makes a down payment on deficit reduction by freezing some nonsecurity discretionary spending for three years, and by letting the Bush tax cuts for the richest Americans expire at the end of this year.

To truly tame deficits will require serious health care reform, the sooner the better. Other aspects of the long-term fiscal problem — raising taxes and retooling Social Security — must take place in earnest as the economy recovers.

Contrary to popular belief, there are many well-thought-out ideas for such reforms. Where technical questions are difficult, particularly on health care costs, reformers have advocated demonstration projects that can be tested over time. Where the real difficulty lies is summoning the political will to do what must be done, even though it will be unpopular.

If these problems are not addressed, here is what we face: Under current policies, federal debt in the United States — the sum total of annual deficits — would grow from 53 percent of the size of the economy in 2009 to more than 300 percent by 2050, driven mainly by rapidly rising health care costs and, in part, by the aging of the population. Combined, those two factors exert enormous pressure on the government’s biggest spending programs, Medicare and Medicaid, and, to a lesser extent, Social Security.

Unless health care costs are controlled, there is no way to solve the country’s long-term deficit and debt problems.

But that will not be enough. Broad tax reform is also essential to ensure that revenues keep pace with expenditures. From 1978 to 2008, revenues averaged about 18.4 percent of the economy. But without policy changes, expenditures for everything other than interest on the national debt will increase from 19.2 percent of the size of the economy in 2008 to 24.5 percent in 2050.

On the need for more taxes, Mr. Obama has been less than candid, pledging never to raise taxes on anyone making less than $250,000. Republican lawmakers have been worse, calling for tax cuts at most every opportunity — and never acknowledging that a shortfall in revenue is one of the important causes of the deficit.

The deficit commission that Mr. Obama intends to establish could be helpful in breaking this logjam, by calling for necessary changes that politicians would be loath to broach without political cover.

We hope that health care reform will move ahead before that. If it does, the commission will still have to press for new taxes that both raise revenue and broaden the tax base, including a value added tax.

And then there is Social Security. What is needed is a combination of benefit cuts and tax increases that preserve the program’s essential nature — a contract under which the young support the old via taxes and the rich help the poor via a benefits formula that favors low- income beneficiaries. One sound approach would be to link benefit levels to life expectancy, so that as people live longer, future benefits would be modestly reduced while payroll taxes that support Social Security would be modestly increased.

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There is no way to get deficits under control until our political leaders are willing to acknowledge difficult truths and make even more difficult political choices. We have heard and seen too little of that from the Democrats lately, and none at all from the Republicans. That is truly a recipe for disaster.