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As lawmakers consider passing a hefty economic stimulus package to address the nation’s economic woes, they should be careful to weigh the long-run consequences of a deficit-financed budget expansion. Although fiscal stimulus may be a necessary policy option, lawmakers should be equally concerned about containing unsustainable spending and restoring the nation’s long-run fiscal health.
Kevin A. Hassett
We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.
The Congressional Budget Office last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion, roughly triple what it was in 2008. We should hope we are that lucky. The deficit will be that low only if Uncle Sam dies and goes to heaven.
If we want to create optimism about our future, we need to provide a reason. The only sensible path is for the U.S. to put its long-term fiscal house in order.
Make no mistake, the CBO forecast is the lowest of lowball estimates. It excludes President-elect Barack Obama’s proposed stimulus package and understates the likely costs of the Iraq war, among other things. A comprehensive estimate that accounts for all “known knowns,” as Donald Rumsfeld might say, would be higher by about half a trillion dollars. If the stimulus bill passes, the deficit next year will be $1.7 trillion.
A trillion is a strange and difficult number to contemplate, but thinking through the economic implications of that massive deficit requires doing so.
The number itself is one million millions. A government that started with a balanced budget could run a $1.7 trillion deficit by mailing 1.7 million households $1 million, or 17 million households $100,000.
Military and More
Or try this. The whole world’s military spending in 2006 totaled a little less than $1.2 trillion. So next year’s U.S. deficit could cover that and still have $500 billion left over for building bridges.
Perhaps the most disturbing comparison is this one: When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.
How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009.
The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.
Compounding the Problem
One reason the increase is so dramatic is the mystery of compounding. Each year, Congress passed pork-laden expenditure bills, which became part of the long-run baseline the minute they became law. Each time that the federal government wasted a billion dollars, it created budget space to waste $1 billion again and again, ad infinitum.
That’s perhaps the scariest fact about next year’s budget. The skyrocketing spending of 2009 will be the CBO baseline for every year after that. It will be easy to provide health care to everyone; the budget space will be blocked out. Indeed, Congress can spend with impunity in years to come, covered by the protective shroud of the CBO baseline that this year delivers.
We can ride big government spending and trillion-dollar deficits all the way to 2017, when the Social Security trust fund itself starts running deficits.
This year may establish a government-spending black hole with gravity strong enough to suck the U.S. economy over the event horizon. Such a spending path has two possible endgames. Neither is pretty.
Print or Tax
The Federal Reserve could print enough money to accommodate all of that debt, in which case the dollar will collapse and the U.S. will be looking at a South-America-style run on its debt.
Or the U.S. government could get its fiscal act in order with higher taxes. For that to happen, income taxes would approximately have to double.
While advocates of Keynesian-style stimulus are correct that this economy is terrible enough to warrant dramatic action, it is hard to understand how such a fiscal path might help. So what if second-quarter gross domestic product blips up a little bit? What business is going to expand its operations with the mother of all tax hikes peeking over the horizon? If government spending provided such a wonderful boost to the economy, we would be in Nirvana already.
If we want to create optimism about our future, we need to provide a reason. Putting a ring road around every city in the U.S. will not accomplish that. The only sensible path is for the U.S. to put its long-term fiscal house in order. Without that, this year’s stimulus will likely be a historic flop.
The good news is that a bipartisan group of senators, led by Democrat Kent Conrad of North Dakota and Republican Judd Gregg of New Hampshire, is on the right track.
Their idea is for Congress to empower a commission to make the tough choices about future benefits and taxes to restore sanity to the U.S. budget outlook, and then to fast-track the commission’s recommendations to an up-or-down vote. If Congress fails to take Conrad and Gregg seriously, we may all be headed for the bread line.
Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.
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