Columns

Thursday, August 5, 2004

deficits do matter!

Somebody once joked that balancing the federal budget is like going to heaven. Everybody wants to do it, but nobody wants to make the trip. But with this year’s red ink now projected to hit an all-time record, budget deficits are no joking matter. In fact, they are a clear and present danger to America’s economic well-being.

What is the deficit and the national debt?

The deficit is simply the amount of money the government spends in excess of the money it takes in through taxes, fees, tariffs, etc. According to the most recent projection for 2004, Washington will spend a record $422 billion more than it will take in. The national debt is the total amount the government owes – the sum total of all the deficits piled up over the years, minus the surpluses. Today, the publicly held debt stands at about $4.3 trillion. This number does not include more than $3 trillion that has been “borrowed” from – and is owed to -- Social Security, Medicare, and other so-called trust funds.

Why the big turnaround from surpluses to deficits in recent years?

In the late 1990s, the federal government was racking up budget surpluses for the first time in three decades. Amazingly, we were on track to pile up enough surpluses to totally eliminate the publicly held national debt by 2009. This was crucial to getting the federal government in sound financial shape to meet the Medicare and Social Security costs of retiring baby boomers. That bright prospect is now gone. Instead, we are looking at mammoth deficits – and skyrocketing debt -- as far as the eye can see. Why? There are many reasons, but the biggest single reason is that income tax receipts have fallen to their smallest share of the economy in more than 60 years largely because of tax cuts.

Five reasons why big deficits and big debt are a big, big problem:

1) We have to pay interest on all that debt. This year, interest will be about $160 billion; that number will nearly double by 2009. This is money down the drain. 2) Recently, our government was selling a shocking 86 percent of its publicly held debt to foreign governments. China, Japan and South Korea – among our biggest trading partners – are some of our biggest lenders. It’s hard to demand fair trade practices from countries that we count on to finance our debt. 3) With the government as the 800-pound gorilla in credit markets, there is less capital available for private investment. Eventually, interest rates will rise. 4) The baby boomers are near retirement. When they do, Social Security and Medicare costs will soar, and we will be less prepared to meet those huge financial burdens. 5) Confidence in the economy is sapped by long-term deficits.

What should we do about it? When you are in a hole, stop digging! Through the 1990s we had a sensible policy that any tax cuts or entitlement spending increases would have to be fully paid for with revenue increases or spending cuts elsewhere. This is called “pay as you go,” and it worked. We need to go back to this common-sense policy. In addition, while preserving the very modest tax cuts for working Americans, we need to reverse the big, unaffordable tax cuts for the top one or two percent of income earners. We don’t need the administration’s plan to spend tens of billions attempting to put a human on Mars. And we need to reverse the crazy provision in the new prescription drug law that forbids the federal government from negotiating lower prices with the drug companies. We can reverse these deficits and get back on track!