This is a guest blog sent to me by Richard Salzman. I thought is was worth passing on.
Why We Should Beware Budget-Deficit Mania
THURSDAY, NOVEMBER 11, 2010
We're in for another round of budget-deficit mania.
The first draft of the President's deficit commission, written by its co-chairmen Erskine Bowles and Alan Simpson, is a pastiche of ideas - some good, some dumb, some intriguing, some wacky. The only unifying principle behind their effort seems to be to throw enough at the wall that something's bound to stick.
At their best, presidential commissions focus the public's attention - not only on the right solution to some important problem but also on the right problem. Sadly, this preliminary report does neither.
As to solution, the report mentions but doesn't emphasize the biggest driver of future deficits - the relentless rise in health-care costs coupled with the pending corrosion of 77 million boomer bodies. This is 70 percent of the problem, but it gets about 3 percent of the space in the draft.
The report suffers a more fundamental error - the unquestioned assumption that America's biggest economic challenge is to reduce the federal budget deficit.
The size of the budget deficit (and cumulative debt) is meaningless without reference to the size of the economy. What looks like a big debt 10 or 20 years from now may turn out to be small if growth has been rapid in the intervening years. By the same token, a seemingly small future debt can become unmanageable if the economy tanks, or barely grows at all.
In 1945, the nation's debt was 120 percent of GDP. That proved to be no problem in later years, not because the debt shrank but because the U.S. economy soared.
Our biggest problem isn't the size of pending federal budget deficits or debt but an anemic recovery that may drag on for years. And unless we're careful, budget-deficit mania may further slow economic growth - thereby making future debts even less manageable.
If Congress and the President started right now to cut the federal deficit - slashing spending and raising taxes on the middle class - our anemic economy would quickly become comatose.
That's because consumers still aren't spending much. They're overburdened by personal debt and don't qualify for new bank loans. And absent enough consumers, businesses still aren't spending on new factories, equipment, additional hiring. Instead, they're expanding capacity abroad, buying back their own shares of stock, and gobbling up other companies. Exports can't possibly make up the slack.
That leaves government. Until we get out of the gravitational pull of the Great Recession, government is the only remaining booster rocket. If anything, we need more government spending and lower taxes on the middle class. This means bigger deficits, at least for the time being.
Even worse, budget-deficit mania will slow future growth if it forces government to cut the things that fuel growth - education, basic R&D, child health, improved infrastructure.
No smart family would choose to balance the family budget over borrowing money to send the kids to college. The same logic holds for the nation as a whole. If certain government spending generates higher future productivity, we'd be nuts not to make the investment just to avoid a larger deficit.
Public investments like these are becoming ever more important to our future well being because private investment is more footloose globally. Giant American-based companies are now making more money abroad - and investing more there - than in the U.S. How do we get global capital to create good jobs in America? By having the skills and infrastructure to attract it.
Yet the deficit maniacs often want to slash spending across the board, including such key investments. And they often want to eliminate tax breaks that encourage these investments. (The Bowles-Simpson report is guilty of this.)
Don't get me wrong. America's projected budget deficits require attention. But in addressing them we need to focus on the right solutions, and make sure we're solving the right problem.
The preliminary report of the President's deficit commission doesn't help. It's another example of budget-deficit mania generating more heat than light.
The first link below will allow you to attempt to balance the budget your way. See for yourself if you can.