By ScottBittle on October 20th, 2008

More and more economists are arguing that a global financial crisis isn't the time to worry about the federal deficit. A wide range of budget expert and economists – even the ones who'd normally be considered budget hawks -- say the government has to do whatever it takes to stabilize the financial markets, get credit flowing, and mitigate the recession that's almost certainly upon us. If that means running deficits, they argue, then that's what we'll have to do.

And make no mistake about it: the federal government will run deficits over the next few years. The Congressional Budget Office projected deficits of more than $400 billion for the next two years, even before the global financial crisis hit. Since then, we've added a $700 billion bailout plan, and the next presidential administration will very probably add some sort of additional stimulus package to that. That could add up to an unprecedented $1 trillion deficit next year.

Despite any campaign rhetoric you may have heard, it's going to be almost impossible to balance the budget under those circumstances. You can't possibly cut spending enough or raise taxes enough to bring those figures into line without doing massive damage to vital programs or to the broader economy.

So, fair enough. When you're trying to put out a fire, you don't worry about how much water you're using. No one wants the U.S. economy to wind up like Japan in the 1990s. The real challenge facing us will be making sure the solution to the current crisis doesn't set us up for the next one.

It's absolutely true, there are times when running a deficit makes sense. And if the government only ran in the red during recessions and national emergencies, we'd be laughing. But in this country, we routinely ask more of the government than we're willing to pay for. The U.S. has run a deficit for 31 of the last 35 years, and we weren't in a constant state of crisis for those decades. Deficits are the default setting, and they make it harder to deal with real emergencies when they do crop up.

Secondly, the long-term outlook for the federal budget is very, very ugly. Every expert who looks at the long-term state of the budget uses the same word to describe it: unsustainable. The national debt has reached a staggering $10 trillion, and we've got another $53 trillion in liabilities ahead of us to pay for Medicare and Social Security for the baby boomers.

The national debt and those future liabilities could represent the next crisis, after this one. Unless we get the government's financial house in order, unless we find a way of paying for Medicare and Social Security, we'll be looking at a government debt crisis that could be just as painful – and just as avoidable – as the current financial meltdown.

The good news is that, unlike the global financial meltdown, we still have time to deal with the federal budget. Not much time, perhaps, but some. The key thing now is to cope with the current credit crisis and slumping economy without making our long-term budget problems too much worse. We probably can't avoid adding to the national debt to get through the current emergency. But we can at least make sure the money we're borrowing is used wisely: to stimulate the economy and make decisions that will strengthen us in the long run. And we can – we absolutely must -- start the hard work of fixing Social Security and Medicare before they get out of hand.

Otherwise, we may find a second fire has been smoldering while we're been preoccupied with putting this one out.


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Re: The Crisis After This One

On December 13th, 2008 Lisa O says:

The recession that America is currently undergoing which started in December of 2007 has resulted in over 1.5 million jobs being lost in the last year. Struggling consumers are turning to payday loans and debt consolidation services in an effort to stay atop of the current economic pressure. We are currently enduring one of the longest recessions that we have had since the Great Depression, being exceeded by only two others. Could we possibly be facing another economic disaster like we did in the 1930's? America’s habits of consumption are unprecedented across the globe. There is no other nation which consumes more than we do. We are a nation that never fails for wanting the latest and greatest of everything and if we can't afford it, there is an abundance of financing options such as short term installment loans, payday loans, or credit card cash advances that help us to obtain it. Today consumers owe an average of over $8000 in consumer credit debt alone. Our ability to over-overextend ourselves financially has finally put us, as well as our country, at risk. We must begin to think responsibly about our finances, both how we use them and what we use them for. We, as a nation, must begin to think about conservation with not only our money but with our energy and water supplies as well. Despite the economic downturn in this country we must remember to be thankful, as even in our current state we have more than most could ever dream of being thankful for. It’s a fact that 80% of the world lives on less than $10 a day and the poorest 40 percent of the world’s population accounts for 5 percent of global income. The richest 20 percent of the world accounts for three-quarters of the world income. If you have a roof over your head, food on the table and running water, you are richer than 80% of the world’s population. So, wake up America, count your blessings, and be cautiously proactive in limiting your consumption habits. Practice conservation so that you will have more yourself as well as more to give others. Click here to read more on consumer use of Depressed economy seeks solace in payday loans.


Re: The Crisis After This One

On December 28th, 2008 Goodomen says:

Scott is right. With the current tax and spend mentality of our national leaders, our country continues to add to the national debt without really seeing the danger in doing so. Our country has spent itself into this problem by taking on more credit than we can afford (the government leading the way) and now government proposes to get us out of the problem by spending even more! That's not putting water on the fire, it's throwing a can of gasoline onto it.

If we face up to the fact that this country, as well as much of the world, is addicted to credit (spending beyond our means) we can start to put the brakes on on this runaway train. We have to start to live by the old time standard of "pay-as-you-go" in order to get the correct economic mindset back in this country. A free market economy functions best on a pay-as-you-go basis, too much credit gives a false sense of security and gives a false view of both supply and demand. Thus people spend what they don't have until they have spent more than they will ever be able to pay back. Then their posterity becomes liable for the debt. This is tantamount to taxing future generations to pay for our current "standard of living." Our country faught a war for independence partly because they were being taxed without representation. How can we continue to increase the national debt and "tax" our posterity, without them being here to represent themselves, to save us from the natural consequences of spending more than we make?

This country needs to return to a pay-as-you-go philosophy in which the only things we go into debt for are those we can pay for within our lifetime. The country likewise needs to rid itself of the national debt in stead of adding to it to eliminate the consequences of having spent our posterities future.

Davie Crockett once had an experience that awakened him to the need for government to behave in a financially responsible manner. The following site is a true story and illustrates the original intent of "general welfare" http://www.juntosociety.com/patriotism/inytg.html. We need to return to that philosophy in order to eliminate the cause of the current crisis. Sometimes the best way to put out a fire is to cut off the source of the fuel instead of putting water on it.


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