Analysis: Deficit spending is tough medicine

00_trillion_dollarsBy TOM RAUM

It’s a painful dilemma. The expected growth of the federal government budget deficit to $1.2 trillion this year could swamp future generations with a tidal wave of debt. But failure to spend huge piles of money on stimuli could capsize an already foundering economy.

The deficit projected by the nonpartisan Congressional Budget Office on Wednesday is an unprecedented number of dollars. As a percentage of the U.S. economy, it would be the largest since World War II.

And the $1.2 trillion deficit is just for the budget year that began last October 1.

The proposed deficit will grow even more if President-elect Barack Obama’s sweeping stimulus package is enacted. That could add nearly another $1 trillion or more to the red ink over two years. If you add in what the federal government still owes from past years, the total national debt now stands at $10.64 trillion.

That’s roughly $37,000 for every man, woman and child in the United States. And with spending rising and tax revenues falling, the total debt is expected to approach $12 trillion by year’s end.

Yet there’s a consensus, shared by Democrats and many Republicans, that some form of major stimulus – either new spending, tax cuts or a mix – is needed to tame what is already the worst recession in a generation and to prevent it from widening into another Great Depression. Republicans generally argue for larger tax cuts as part of the stimulus brew.

“I’ve never seen harder days to be a deficit hawk,” said Robert Bixby, the executive director of the Concord Coalition, a nonpartisan group that advocates fiscal restraint.

“The numbers that are being thrown around now for stimulus are just huge. The whole thing is just turning into a massive wish list,” said Bixby.

Still, he said, “a credible case can be made that you need some stimulus,” so long as it is short term and doesn’t include permanent new spending programs. It’s hard to believe that just eight years ago – as President Bill Clinton was leaving office and Texas Gov. George Bush was preparing to be sworn in – there was a projected $5.6 trillion ten-year budget surplus. Both Clinton and Bush talked of using part of it to retire the national debt by the end of the decade. That would be the end of next year.

Instead, the bursting of the technology bubble, big Bush tax cuts, the 9/11 attacks, wars in Afghanistan and Iraq, increased spending on homeland security, a mild recession in 2001 and the heavy one now intervened. Heavy public spending is a traditional antidote for healing severe recessions, regardless of the impact on deficits. The big-spending, FDR-type programs of the 1930s are often held up as an example.

Many economists note that when President Franklin D. Roosevelt turned cautious in 1937, cutting spending and raising taxes in an attempt to get the deficit under control, it backfired and touched off a new sharp downturn that lasted through 1938. “The prevailing opinion is that, if we have to increase the deficit, let’s increase the deficit. We’ll fix it later,” said former congressional budget analyst Stanley Collender.

Some conservative economists argue that major spending on public works projects in Japan in the 1990s did little to shorten that nation’s decade-long recession.

President-elect Barack Obama mentioned the new gloomy CBO deficit projection at his news conference on Wednesday. “We know that our recovery and reinvestment plan will necessarily add more,” he conceded.

But “unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come,” he said. “Our problem is not just a deficit of dollars; it’s a deficit of accountability and a deficit of trust.”

00_whoownsnationaldebtObama’s plan is designed to create some three million jobs. He said he would seek longer-term, offsetting cuts in unnecessary spending and changes in Social Security and Medicare to help bring government spending in line. He named a management consultant to head a new White House position on eliminating government waste and improving efficiency.

This year’s deficit will equal 8.3 percent of the nation’s gross domestic product, the CBO said. That makes it larger than the previous postwar record of 6 percent reached in 1983 under President Ronald Reagan. But it’s still dwarfed by deficits during World War II: 30 percent of GDP in 1943, 23 percent in 1944 and 22 percent in 1945.

Among the risks of ever-expanding deficits: Interest payments on the debt will become a larger and larger slice of the government’s total budget pie, eventually squeezing out other crucial spending. That could mean draconian spending cuts, big tax hikes or both.

Ever-increasing deficits would also pressure the U.S. to borrow more and more from overseas creditors, principally China, Japan and Britain. If any of those countries decided to flee Treasuries or other dollar-denominated assets, it could send shock waves through the global economy – and sharply force up U.S. interest rates.

The new deficit projection follows a study by the Peter G. Peterson Foundation in New York that the sum of America’s liabilities and financial commitments now exceeds the collective net worth of its citizens, in part due to the drop in America’s net worth from lower home values and the government’s unfunded promises for social insurance programs such as Medicare and Social Security. Peterson, a billionaire co-founder of the Blackstone Group LP private equity firm and commerce secretary under President Nixon, is a leading crusader for deficit discipline and financed the 2008 documentary movie “I.O.U.S.A” that warns of the dangers of runaway deficits.

Obama and Congress need to “not only turn the economy around and boost consumer confidence, but put a process in place that will lead to tough choices getting made to strengthen the government’s financial condition once the economy begins growing again,” says Peterson foundation chief executive David M. Walker.

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1 comment
  1. Hank Wilfong said:

    Response to Deficit spending is tough medicine:

    It truly IS a painful dilemma to realize that one must go deeper into debt, in order to dig out of the hole we’re in, and avoid a more serious recession, and stimulate a stagnant economy. But, then, look at the situation we’ve just admitted

    We ARE in a “recession”- a serious one. And we HAVE a “stagnant economy”- a serious one. And, we are “deep in debt”- very deep. None of this is gonna get better unless we do some anti-typical things. Unless we do some things to dig our way out. Unless we create some “buying” to stimulate the stagnant economy. A heated up economy will create “confidence” and with that more spending, and more jobs.

    The key is to realize what we’re doing is “anti-typical”, and should be, therefore, short-term.

    Look, tax cuts are NOT gonna cause businesses to “spend”. Rather, they will tend to cause them to shore up their infrastructure, to make them strong, to enhance their bottomline. But, now is not about “increasing profit’. Now, is about “cash-flow”. We must put the money into the hands of those who will put it back into the economy, by spending it. Workers who have money, spend it. That’s what we need right now.

    The infrastructure we need to concentrate on building and refurbishing now, is the infrastructure President-elect Obama is talking about. Highways, and other public projects are an idea way to jump-start the economy with putting money into the pockets of folk who will spend it-immediately. Furthermore what they “produce” will be visual and instance evidence of the country “moving again”, to get positive things done.

    Don’t listen to the economists and talk about “$37,000 per person”. Taken like we just wrote it, we challenge you to make sense out of it. To determine whether “37,000 per person” is a good thing or a bad thing. This we do know, from history. If we delay now, and things get worse, that “37,000 per person”, will more likely raise to “$50,000 per person”.

    Do, the Infrastructure Stimulus Package. Put some money into the hands of some “anxious to spend” workers. And, watch the economy be “stimulated”.

    Henry T. Wilfong Jr., MBA, CPA
    President, NASDB
    Current or Former Positions:
    Three-time Appointee of Governor and President Ronald Reagan
    Pasadena, CA City Councilman
    Member, Bush-Cheney Transition Team-SBA Advisory Group
    Member, Department of Energy, Small Business Advisory Committee
    Associate Administrator for Minority Small Business/Capital Ownership Development, SBA
    Member, National Council on Policy Review-Black Capitalism
    Member, Presidential Task Force on International Private Enterprise
    Member, California Council on Criminal Justice
    Member, NASA Advisory Council
    Chair, NASA Minority Business Resource Advisory Committee
    Co-Chair, Unity Network and Black Republicans for Obama/(BRO)

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