Big-time federal deficits have been around since World War II. Since then, the accumulation of annual deficits has always been a potential problem. For some in the economics trade, it has been a constant worry — something that threatened to undermine the U.S. economy in good times or to derail it in bad times.
For many people the deficit was a wallflower at the bailout ball. This week, though, it took to the floor as an issue when President Barack Obama announced that he planned to cut it in half.
It can’t be a coincidence that the announcement was made just as Congress prepared to consider a huge budget bill.
President Obama’s plan envisions bringing the deficit of more than $1.5 trillion — we don’t really know how much more, but that’s another story — down to about $800 billion by the end of his four-year term. This is an ambitious and praiseworthy plan, though its realism content is well below the recommended minimum daily dosage, even for Washington, D.C.
The president deserves credit for focusing attention on this problem and trying to set some goals for his administration. Still, no matter how laudable his intentions, the plan has no real chance of working during a period where we are fighting a recession with a banking system that isn’t even suited up for the game. Putting things right will cost taxpayer money and that will cause deficits.
The president’s plan is based on three fundamental ideas: reducing the Defense Department budget by bringing troops home from Iraq; reducing government waste; and raising taxes on the rich. The history of measures like these, though, suggests that they don’t pay off nearly as much as we’d hoped.
On the defense budget side, part of the reason why budget cutting will be difficult is simply that things have changed. It isn’t like “bringing the boys home” after World War II, Korea, or even Vietnam. In each of those cases most of those who had been serving overseas were promptly discharged and returned to civilian life.
When the troops return from Iraq, some may leave for civilian life, but we are not likely to see a major contraction in U.S. military strength unless there is some miraculous transformation in the world security situation. We will probably see a military composed of smaller, lighter, more mobile forces, kept at a higher level of readiness and with increasingly high-tech intelligence and operational support — but it is not clear how this will translate into billions of dollars in savings.
The anticipated savings in Iraq will probably end up sharing the fate of the expected “peace dividend” from the end of the Cold War.
The president’s thrust to reduce waste in government spending has some promise, but redlining wasteful programs isn’t as easy in real life as it was in the movie, “Dave,” which involved a presidential body double who became the real president and astounded Washington by using simple logic to cut the budget. Virtually every dollar in discretionary federal spending is tied to somebody’s dreams of re-election. The real hope for the president’s plan is to find the programs whose sponsors in Congress have moved on, moved out, or otherwise lost interest. It’s more political savvy than accounting or economics, but a sharp eye and a sharp pencil can find billions of dollars.
The third pillar of the program, higher taxes for the rich, would undoubtedly raise more cash in the short run but the effects on the economy are difficult to assess. From an economics standpoint, the smart play with these taxes is to not get greedy. The budget is down by hundreds of billions of dollars. Look at it as if you were a quarterback facing a second down, 28 yards to go … and don’t try to make it all up in one play.
We are already seeing some of the effects of our accumulated debt as investors are losing their appetite for U.S. Treasury long-term debt, raising our cost of borrowing. The president is right to focus attention on the problem, and if we are lucky, time and public comment will add more realism to his plan to address it.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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