Balancing the Budget

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The New York Sun

To those who believe our leading politicians are utterly shameless, there was dreary confirmation last week. President Bush publicly bragged about the federal budget. Here’s the objective situation that inspired the president’s self-congratulation: With the unemployment rate at 4.6% (close to “full employment” by anyone’s definition), the White House and Congress still can’t balance the budget. For fiscal 2006 (ending in September), the administration projects a $296 billion deficit; for fiscal 2007, the estimate is $339 billion. How could anyone boast about that?

Easy. In February, the administration projected a $423 billion deficit for 2006; so the latest figure is a huge drop. A skeptic might say that the first estimate was inept; some cynics argue it was deliberately exaggerated to magnify any subsequent improvement. Naturally, the president had a different story. The shrinking deficits, he said, proved that his tax cuts are working. The economy is great; the budget benefits. All around Washington, Republicans staged press events to hug themselves for their good work.

The tendency for politicians to claim credit for favorable news is as natural as flatulence in cows. Still, the Republicans’ orgy of self-approval amounts to a campaign of public disinformation. It obscures our true budget predicament. Let’s go back to basics. Here are two essential points.

First, budget deficits are not automatically an economic calamity. Their effects depend on their timing, their size and other economic conditions. During recessions, deficits may prop up the economy. In a boom, they may drain money from productive investments. Similarly, deficits are only one influence on interest rates; others include inflation, the demand to borrow, the supply of savings and Federal Reserve policy. At present, the effect of deficits is modest; otherwise, rates would be higher than they are (about 5% on 10-year Treasury bonds).

What truly matters is government spending. If it rises, then future taxes or deficits must follow. There’s no escaping that logic. The spending that now dominates the budget is for retirees. Social Security, Medicare (health insurance for those 65 and over) and Medicaid (partial insurance for nursing homes) already exceed 40% of federal spending. As baby boomers retire, these costs will explode. Unless they’re curbed, they’ll require tax increases of 30% to 50% over the next 25 years.

Second, the budget should be balanced — or run a surplus — when the economy is close to “full employment,” as now. Balancing the budget forces politicians to make uncomfortable choices. Which programs are sufficiently needed or popular to justify unpleasant taxes? Balancing the budget also lightens the debt burden. One figure Bush doesn’t praise is the annual interest payment on the growing federal debt. Even by White House estimates, it will rise from $184 billion in 2005 to $302 billion in 2011.

Some conservatives rationalize their indifference to deficits as “starving the beast.” If you cut taxes and create deficits, government will spend less because it has less — much like a teenager whose allowance is cut. But the theory doesn’t fit the facts. Economist William Niskanen of the Cato Institute, who worked in the Reagan administration, examined the relationship between deficits and federal spending from 1981 to 2005. He found that, contrary to the theory, spending rises when deficits rise. Deficits are what they seem: a way for politicians to escape inconvenient choices.

I have reserved my harshest scorn for Republicans, who are (after all) in power. But Democrats aren’t much better. The nub of the matter is spending. When Republicans passed the Medicare drug benefit — the biggest new program in decades — Democrats actually advocated a more costly version. Whenever anyone suggests curbing spending, Democrats screech: Spare Social Security and Medicare. But Social Security and Medicare are the problem.

Just as Republicans now say their policies have cut deficits, Democrats contend their policies produced budget surpluses from 1998 to 2001. Nonsense. Those surpluses resulted mainly from the end of the Cold War (which lowered defense spending) and the economic boom (which created an unpredicted surge of taxes). In a $13 trillion economy, much of what happens has little to do with the White House’s economic policies. The bipartisan reflex is to claim credit where little is due.

Sooner or later, an aging society will force taxes up and benefits down. But later, not sooner. The oldest baby boomers don’t turn 65 until 2011. Meanwhile, it is precisely because the deficits don’t threaten immediate economic turmoil that they are politically appealing. Nothing significant will happen because it’s in no one’s interest for anything significant to happen.Republicans don’t want to raise taxes or restrain their spendthrift habits. Democrats love big deficits as rhetorical grenades to lob at the Republicans. The present paralysis is perfectly understandable. But to brag about it is disgraceful.

The New York Sun

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