Wednesday, April 13, 2011

The Debt is Coming, The Debt is Coming!

Okay, I'll play.

We've known for ages that the National Debt was an albatross around the necks of our future solvency. And as should be expected in our attention deficit afflicted political system, the unpopular choices have been kicked down the road time and again.

Let's start our story in 1993 when President Bill Clinton and Congress passed the Omnibus Budget Reconciliation Act of 1993. Built into the act was a mandate to balance the federal budget over a number of years.This passed without a single Republican vote. Let me repeat that. Without a single Republican vote.

By the year 1998 this had been achieved. We had a budget surplus for the first time in 30 years. The economy was humming and our house was in order.

By 2004 we were running record deficits. In the middle of a boom period. Record deficits.

What the hell happened?

9/11 happened and then we went to war. Military spending skyrocketed. Then the Bush tax cuts happened and tax revenue plummeted. Between the increased costs of the wars and the decreased revenue, we ended up in pretty deep deficits.

The typical rule of thumb has been "surpluses in good times, deficits in bad times" ... this, of course, makes perfect sense. When the economy is going well there's less demand for support services and the tax revenue received can be saved for a rainy day. During bad times that surplus can be tapped into to make up for lost tax revenue through the economic decline. It's a perfectly reasonable and sustainable approach to government spending.

And that's largely what we did as a nation until relatively recently. There was no reason - zero - for not running a continued surplus or at least only a minor deficit from 2002-2007. Usually, when our country has gone to war, taxes have been raised to pay for the fight. An unpopular war is one that voters rise up against, because their tax dollars are not being put to good use. We didn't have that reaction to Afghanistan and then Iraq, because it didn't feel like we were paying for it ... but we were ... and our children will since it was all added to the National Debt.

Then things went in the shitter. In 2007 the bottom fell out of the housing boom. In retrospect it looks almost inevitable, but at the time a lot of supposedly smart people got caught with their pants down.

Our record deficits we were running during the boom from 2004-2007 became astronomical in the "Great Recession" of 2008-2010. Why? Well, again, it's pretty simple.

1. More people need support services during bad times.
2. Tax revenues declined as they always do during a recession.
3. We're still at war.

Now we have an astronomical deficit and a rapidly increasing National Debt, which will quickly become unsupportable.

We're caught in a really hard place. We're supposed to spend our way out of a recession - the government making up for the slack demand in the economy until the private sector recovers and can get the economy going again on its own. Pretty simple math, really.

But now nobody in Washington has the spine to add more stimulus to our moribund recovery.

Instead, inexplicably, deficit hawks have begun targeting budget cuts to reduce the deficit. In a show of complete idiocy, the GOP threatened to shut down the federal government over $30B in federal spending. To put it in perspective, $30B represents a 1.8% reduction of the 2011 budget deficit (and less than 1% of the 2011 budget) This is just a couple months after the Republicans passed (and Obama signed) an $858B 2 year tax cut extension. So here's the math. If those tax revenues had been applied to the 2011 budget, we could have reduced the deficit by ~25%. Yep. The GOP wanted to shut the government down over 1.8%, but fought hard against 25%.

So now we've established that the GOP isn't serious about cutting the deficit. But neither are Democrats. At least not in the ways that are necessary to make this really happen.

This isn't the time to focus on deficits anyway - our economy isn't even out of the ditch yet - but if we were to focus on deficits, the solutions are surprisingly simple. But they are deeply unpopular.

Long term health of our government's budget will require raising taxes, reforming entitlement programs, and deeply cutting military spending. But who really wants to do any of that? Other than people who are sincerely committed to reducing the Federal Debt?

Oh wait. President Obama just released his 12 year plan to reduce the federal debt by ... raising taxes, reforming entitlement programs, and deeply cutting military spending. Well done, Mr. President. I can't wait to watch the inevitable Republican backlash to your reasonable approach to this contentious issue.

No comments:

Post a Comment