Why Deficits Matter
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A contradictory perspective, known as the "savings-glut" theory, has it that the world—especially the rapidly-growing Asian economies and other oil-rich nations—have so much excess savings that they can't find a better place to invest them. In this scenario, foreign lenders are bound to continue investing in dollars for the time being, and the trade imbalance will eventually correct itself independent of the national deficit. But not everyone is convinced. "It's essentially a Ponzi game argument," says William Cline, a senior fellow at the International Institute for Economics and the author of The United States as a Debtor Nation. "Even if the rest of the world will give us a long length of rope with which to hang ourselves we shouldn’t take it."
Fixing the Deficit
So what can the United States do to fix this precarious situation? Many people suggest that the key to alleviating the current account deficit is to reduce or close the trade deficit—currently, America imports far more than it exports. China is the usual scapegoat here, and some contend that the fact that the Chinese central bank keeps the dollar artificially high hurts American industry by leading to a flood of cheap Chinese exports. To that end, some economists, like Cline, recommend a devaluation of the dollar by about 20 percent, along with a revaluation of Asian currencies, as a way to correct the trade deficit. But even with a revaluation, the United States would still need to enact its own reforms to reduce the risk that a slight depreciation in the dollar would turn into a rapid sell-off of dollars and the much-feared "hard landing."
But the United States faces serious obstacles to getting its financial house in order. The coming retirement of 78 million baby boomers is expected to swell obligations by the federal government: among other things, Medicare and Medicaid expenditures are projected to soar from 4 percent of GDP today to 20 percent by 2050. Add to that the total cost of the war in Iraq—which economist Joseph Stiglitz recently pegged at $2 trillion—and current budget deficits, and the debt problem will grow to unsustainable levels at the country's current pace.
That means that either taxes need to rise or government spending needs to be cut, both now and in the future. The Bush administration's FY2006 budget promised the first decrease in spending in eight years, but the cuts to discretionary spending are so feeble that the budget will still increase the national debt by $30 billion. Indeed, discretionary spending—spending that has to be authorized by Congress each year—makes up only a fraction of the budget. The only way to seriously rein in government spending will be to cut military spending or reform hugely popular entitlements like Social Security and Medicare. Not only that, but taxes will have to go up as well. As the Congressional Budget Office concluded in its January 2006 budget outlook, "A substantial reduction in the growth of spending and perhaps a sizable increase in federal revenue as a share of the economy will be necessary for fiscal stability to be at all likely in the coming decades."
There are no painless solutions here, although there are some other easy steps to encourage Congress to practice fiscal responsibility. The "pay-as-you-go" rule in Congress, for instance, used to force legislators to make sure that all new spending or tax cuts were "paid for" with revenue increases elsewhere. Restoring PAYGO is a perfectly sensible idea. Unfortunately, the budget resolution passed by the House this past May excluded a plan laid by Democrats to reinstate even a modest version of PAYGO.
Meanwhile, it would be relatively easy to allow that the Congressional Budget Office put out more realistic budget estimates. As currently written, statutory guidelines constrain the CBO, forcing it to make estimates that don't take into account, for instance, the cost of emergency military appropriations for Iraq and Afghanistan, as well as the costs of tax-cuts that aren't yet passed but very likely to be. That means the CBO often paints a less dire picture of the budget than is actually the case, and makes it easier for politicians to "hide" the effects of their policies.
Yet the Bush administration has shown no interest in any of these budget reforms. George W. Bush presided over a swing from budget surpluses in 2000 to record deficits, primarily due to tax cuts that disproportionately benefited upper-income Americans and spending increases. And with neither serious spending cuts nor tax increases in the cards anytime soon, the CBO predicts persistent federal deficits from now until 2015 and beyond. Postponing fixes will only make the debt more difficult to surmount in the future.
So what can be done? Comptroller General David Walker urges that Americans "need to start speaking up and make their views known. After all, why should any elected official stick his neck out and make difficult choices when no one seems to care? Younger Americans especially need to get involved in the debate…What’s at stake is future economic growth, our continuing high standard of living, and even America’s continuing role as a superpower." Indeed, it was not long ago that the public began focusing on the skyrocketing national debt under the Reagan administration in the 1980s. That disquiet led, in part, led to a reversal during the first Bush administration and Clinton administration years, which eventually culminated in budget surpluses by 2000. So reform can happen, but it requires that politicians take the long view.
Melanie Colburn is a writer living in the Bay Area.
