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The Budget: Can We Pull This Off?
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By ScottBittle on March 25th, 2009
As the projections for the national debt keep going worse and worse, a lot of people are probably wondering one thing: Can we really get away with this?
"This" is the federal government's strategy of spending huge amounts of money to keep the economy going, despite the fact that the federal budget was in pretty bad shape to begin with. The independent Congressional Budget Office now projects that the federal deficit will be $1.7 trillion this year, and that if President Obama's budget plans are enacted, we'll add $9.3 trillion to the national debt over the next decade. That's $4.8 trillion more than previously estimated.
There's fierce argument over the specifics, but still a bipartisan consensus in Washington that the government has to borrow and spend to stimulate the economy, because nobody else will – the private sector is effectively sidelined as long as credit markets are "frozen," unwilling to lend because of all the bad debt that's already out there.
But in addition to the fight in Washington, this is also starting to make people overseas nervous. China, the largest foreign holder of U.S. debt, is starting to send none-too-subtle signals about how the U.S. manages its money, The new president of the European Union was even blunter this morning, calling American policy "the way to hell." All this will likely lead to an extremely uncomfortable session with world leaders next week on how to deal with the global financial crisis.
The unfortunate fact is that the federal budget was on an unsustainable course even before this crisis hit. Decades of the government spending more than it takes in has left us with a national debt that's already well past $10 trillion. We've got enormous obligations ahead of us for Medicare and Social Security, which threaten to bust the budget and crowd out other priorities.
One way of looking at this is how much the national debt will be as a proportion of the overall economy (or, as economists say, as a percentage of gross domestic product, or GDP). The bigger share the debt takes, the more it crowds out other spending and burdens the economy. In 2008, the federal "debt held by the public" was 41 percent of GDP – not terrible, although it's been much lower. The CBO projects that will double in 10 years, to 82 percent of the total economy. And that's not even counting the money the government's borrowed from Social Security and Medicare, and will have to pay back as the baby boomers retire.
So back to the original question: can we get away with this? Can we spend like crazy now, pile up the national debt, and yet still recover later?
The answer is yes, with two big "ifs."
The first is if the stimulus and bailout plans actually work, and at least shorten the severe recession surrounding us. The government always runs a deficit during a recession; fewer people are working and paying taxes, so revenue dries up. That's normal. When the economy recovers, taxes start rolling in again.
But this recession threatens to be much longer and deeper than any since the Great Depression. The CBO estimates the stimulus plans will increase the employment by about 1.3 percent by the end of 2010 – that's about 2.5 million jobs. If that happens, great, although we're still looking at a long haul to recovery. If not, then the federal budget, and many other things, will be much bleaker.
The second question is if a health care plan is enacted that actually reduces costs. Rising health care costs that drive up spending on Medicare and Medicaid are the largest share of the government's long-term budget problems. Social Security matters too, but it's a smaller piece, and in any case the Obama administration doesn’t seem inclined to take on that problem. They're betting on health care reform.
Most health experts will tell you that it's certainly possible to create a better insurance system that would be cheaper to run. Whether we will, of course, is an open question. Health care is wickedly complicated and loaded with vocal vested interests. If the nation blows it on health care reform, then the chances of getting ahead of the curve on the nation's financial problems become very slim.
Pulling all this off is going to be one of the trickiest maneuvers imaginable, both politically and economically. It's very reminiscent of what the Duke of Wellington said after winning the Battle of Waterloo: "It was the nearest-run thing you ever saw in your life, by God." The budget challenge is looking more and more like a near-run thing, too.
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»A new report finds the main problem in getting the public to deal with our fiscal problems isn't opposition to tax increases or spending cuts -- it's their lack of trust in the government to spend their money wisely.