Numbers are flying all around Washington today, giant numbers with more zeroes than you have toes. A new Congressional Budget Office report projects that President Obama’s budget will produce $9,300,000,000,000 (of $9.3 trillion) worth of red ink for the U.S. Treasury between 2010 and 2019. That is $2,300,000,000,000 ($2.3 trillion) worse than White House bean counters had predicted when they wrote the budget, mainly because the economy has gotten much worse since they did their work.
Members of Congress, meanwhile, are shouting out other numbers. The budget deficit will hit $1.8 trillion in 2009, they say, and $1.4 trillion in 2010. In other words, lots more fingers, lots more toes in the short term. Others point out that under the CBO estimates the nation’s debt is going to balloon, from 41 percent of GDP (a measure of the economy’s size) in 2008 to 82 percent of GDP in 2019. The White House maintains that you should focus on another number. In the briefing today, Robert Gibbs repeatedly emphasized Obama’s intention to cut the deficit in half during his first term compared with the money-losing operation that President Bush was running at the end of his last term, a goal that the administration is still determined to meet.
Almost all of these numbers sound bad, but none of them makes that much sense in isolation. The wonder of numbers is that they are so fungible in policy debates. Gibbs can claim Obama is aiming to cut the problem in half, while the CBO points out that at the same time Obama will be roughly doubling the size of the problem. Neither are lying. And neither are explaining everything you need to know. The job of putting the deficit in proper context is actually quite difficult, mainly because no one really knows what will happen over the coming years. If the economy rebounds with spirit this year, then most doomsday scenarios are less likely to come to pass. If the economy continues to deteriorate over the next five years, then we are all in deep trouble no matter what the deficit is this year. If something in between happens, which is the most likely scenario, the real world impact of the budget debt will be, uh, something in between.
But let me endeavor, nonetheless, on this cool Friday night to attempt to bring some clarity to this confusion. One important fact that is often lost in these discussions is that not all budget debt is equally bad. A trillion dollars deficit this year is not as troubling to economic wizards, for instance, as a trillion dollar deficit in 2015. For this reason, economists often speak of the deficit problem in roughly three categories: Short-term, medium-term and long-term. (Politicians, by contrast, almost never make these distinctions.) Each era of fiscal peril is governed by its own dangers and its own physics. And the Obama Administration’s ability to get Congress to navigate these three eras will play a big role in determining the happiness of your children and grandchildren. So with that introduction, I will now attempt an admittedly rudimentary explanation of what worries and does not worry lawmakers and experts about the sea of red ink in which we all now swim. (After the jump.)
The Short-Term Deficit
In the short term, economists broadly agree that the U.S. Government has to spend far more money than it takes in. That’s because the economy is broken. Private sector spending has collapsed, and a gap has been created between what the economy can produce and what it is producing. That gap, according to Keynsian theories that are widely accepted, should be filled by government borrowing to prevent the economy from slumping further into the abyss. That will get people working and spending again, preventing a much steeper downturn, which could be much more damaging on the nation’s fiscal health.
As a result, most economists are not so concerned about the short-term costs of the stimulus spending, and the bank bailouts, which are making our current deficit so big. “We’ve known since Keynes that short-term deficits should be thought of differently than long-term deficits,” explained Alan Auerbach, an economist at the U.C. Berkeley, expressing a consensus view. “Focusing so much on short term deficits is sort of nutty.”
This is why so many economists get exasperated by the debates on Capitol Hill. Republicans, especially, have recently made a business out of conflating the long-term spending problem, the mid-term spending problems and the short-term spending explosion. These politicians speak of the bailouts to AIG, the costs of new school buildings and the relatively distant entitlement crisis as if each category of spending was interchangeable. They are not. The real problems arises when the government deepens its debt in times of relative economic health, or set up spending programs that do not end, which this country has been doing for much of the last decade. So we come to the issue of. . .
The Medium-Term Deficit
The medium term is that period of time that Auerbach calls “post-recession and pre-catastrophe,” when the current financial crisis will have passed but the full impact of the entitlement crisis has not yet arrived. It is this period that is most debated when members of Congress discuss the Obama budget, a period roughly between five and ten years out, when the world is likely to take a critical eye to America’s fiscal health.
Once upon a time, politicians talked about fiscal responsibility in terms of balancing the budget. The government would strive to only spend what money it raised in receipts, they said. Nowadays, the standard has slipped. Policy makers now talk about not growing the debt-to-GDP ratio, or making sure that the deficit is not any bigger than the growth in the economy, so that the national debt does not take up a greater share of the economy. On the one hand, this concern about spending is about building confidence for the nation’s creditors, who want to know that we will not spend ourselves into oblivion. On the other hand, this concern about spending has to do with keeping as much capital as possible in the private sector, where, economists tell us, it will make our lives better.
“The more the government borrows, the less available for private investment,” explains William Gale, an economist at the Brookings Institution. Less capital for private investment will likely mean lower wages and lower living standards. Earlier this month, Federal Reserve Chairman Ben Bernanke spoke directly to this concern over medium-term spending before Congress. “We have to make sure that in the medium term we have a fiscal position that will allow, and I use this as a rule of thumb,” he said, “the debt-GDP ratio not to be growing so that we can assure ourselves we’ll be able to finance those debts at a reasonable rate and not impose excessive burdens on our children and grandchildren.”
This is where the CBO analysis of Obama’s budget causes so much concern. With a projected slowdown in growth over the coming years, thanks to the current economic situation, the CBO estimates that the deficit spending will never dip below 4 percent of the GDP and sometimes rise as high as 6 percent between 2012 and 2019. The economy meanwhile is expected to grow at about 4 percent once the recovery occurs, which means the debt-to-GDP ration, as laid out by the Obama plan is something less than sustainable. Not only will we be taking on more debt, but we will be taking on debt faster than we expand. And if we can’t control our spending even when the going is good, when will we ever?
This is the problem that Sen. Kent Conrad, the Democratic chair of the Budget Committee, was discussing Friday, when he released a statement in response to the CBO report. “The reality is we are going to have to make adjustments to the President’s budget if we want to keep the deficit on a downward trajectory,” he said. The medium-term problem is therefore the issue that most directly affects Obama’s policy priorities, which include increases in spending on education and energy, and decreased taxes for the middle class. But concern over the medium-term deficit are just peanuts compared to the concerns over the. . .
The Long-Term Deficit
The long-term deficit is the real killer. The only good news is that it is still a few decades out. As it stands, health care spending is growing far faster than the rest of the economy, with no end in sight. As Peter Orszag, the White House Budget director, often says, “If health care costs go up at the same rate over the next four decades as they did over the previous four decades, those two programs [Medicare and Medicaid] go from 5 percent of GDP to 20 percent of GDP by 2050.” In other words: calamity. In this dark future, either the government would be bankrupt or you would be working most of the year just to raise enough money to pay your own health insurance premiums and the taxes needed to fund Medicare and Medicaid. The Social Security program would also be under funded at this point, but it presents a far smaller fiscal risk.
Neither Obama’s budget nor the new CBO estimates deal much with these out years. But the daunting dangers of the coming entitlement crisis hang heavily over all discussions of budget deficits and national debts, because they dwarf by many fingers and toes all the problems we now have. This is also one of the principal reasons that Obama has announced his determination to tackle health care this year. It is a daunting task, because most economists agree that the only way to reign in these costs is to transform the entire health care system, not just Medicare and Medicaid, to slow the growth in treatment cost and make the system more efficient.
The key to solving this problem is to cut costs, but Obama has proposed getting a solution through Congress by promising, at the same time, to expand coverage, which will increase costs. If he just expands coverage, but does not find a way to cut costs, then our fiscal house will be in far weaker shape. But if he can find a way this year to begin a fundamental change in how healthcare works in America, the fiscal benefits will be worth far more than several dozen more bailouts of AIG.
There is much more to say, but the hour is late. Now close down your computer, and go back to watching basketball. There is a lull here to enjoy. The CBO number wars are set to continue Sunday on the network news morning shows, and the fight won’t end there. But from now until then, we can all focus on our NCAA brackets, reveling in the miraculous joy that sports provide: The ability to care a great deal about something that really doesn’t matter much at all.