Fiscal Discipline Now Rather Than Later

Cartoon by Jim Gibson

Great news! The US government budget deficit is smaller than we expected. Now we don’t have to worry about that pesky thing. According to the Congressional Budget Office (CBO) we can expect the US budget deficit for 2013 to weigh in at only $642 billion. That amounts to 4% of the nation’s GDP. That is $200 billion less than expected just a few months ago. Get out the Swisher Sweets and Bud Light – it is time to celebrate.

That really is good news. What is not so good news is that more and more we are hearing that this improvement means we can forget about working on our government debt problems. Before this news was known various economists were reluctant to deal with the national debt problem because such a policy might weaken our economy and prevent a full recovery. Now that the major scare seems to be over, these people are emboldened and louder than ever. But they have it backwards. The recent budgetary progress means it will be even easier to solve our economic problems because we are that much closer to removing the negative impacts of the government on the economy.

Joe, the 5 foot 3 inch 400 pound 14 year old exclaims to his mom – I only gained 20 pounds this year. That’s great honey let’s celebrate by eating a fried potato farm.  That’s pretty much what these people are saying about the debt. A $642 billion deficit in one year means we ADD another $642 billion to our huge government debt. Adding $642 billion instead of $842 billion is definitely a good thing – but it does nothing to reduce the swollen debt. It simply makes it bigger at a slightly slower pace.  But notice that when you are at $642 billion it makes it easier to get to $442 billion…and then to $222 billion. This is the time to keep plugging away at the problem. It is not the time to smoke a cigar and hope good things keep happening.

The CBO’s figures show that the net federal debt which was at a bloated 66.8% of GDP in 2012 will rise to 68.8% this year and then to 69.9% in 2014. More typically this debt was about 35% of the economy before the crisis hit. So let’s say the debt load doubled in about five years. Even with very optimistic assumptions, the CBO sees the debt load at about 66% in 10 years (2023). It is like admitting that after averaging a svelte 200 pounds for much of your life, you have now ballooned to 400 pounds. You now have a 10-year plan to get back down to 375! What a joke. How stupid do they think we are? Don’t answer that.

Can I really make comparisons with overweight people and the government debt? Of course I can. While it is not easy or trivial to decide an optimal country debt load it is very difficult to deny that a country that usually runs debt loads of 35% is not in some way harmed by debt loads of twice that amount. Some experts say that the debt explosion was caused by a weak economy. But notice that the CBO has the debt load at 66% in 2023. They do not believe the economy will be weak for 10 years. It is not the economy that is causing the debt. It is government’s inability to govern that is causing this drag on the economy. Call this drag crowding out or simply call it risk aversion. Either way, too much debt is slowing us down and hurting the average citizen.

One more point that supports a more aggressive approach gets to the idea of jeopardy. Our President moans on camera about our inability to help flood victims one day; tornado victims another day; and Boston bombing victims yet another day. We should all be frustrated about the fact that there are important unmet needs that turn up every day. Your kid needs new braces for her teeth. Sorry honey, we just bought a car we can’t afford and the monthly payments mean we have to wait to get your teeth straightened. Obama cannot complain he doesn’t have enough money to help tornado victims at the same time he supports programs that keep our debt at no less than 66% of GDP for the next 10 years. If you want to be able to help in an emergency then you need an emergency fund. There is no emergency fund because we will spend this year $642 billion more than the government collects.

All of this is made worst by the fact that we know that interest rates are going to rise from their very low levels. This is important for many reasons but a primary consideration is that as interest rates rise we will pay more interest expense on the national debt. With the value of the debt rising AND interest rates rising – interest expense will be a larger and larger component of government spending. Interest expense cannot be cut. It must be paid. This makes cutting the annual deficit and the total debt even harder. It makes helping tornado victims harder.

The worry warts tell us that any attempts to reduce the deficit through policy will be more than the economy can handle. They compare a possible US plan to balance the budget to draconian efforts in Europe that have been blamed on much slower growth in that part of the world.   But we don’t have to do anything extreme with taxes and spending that would send us careening into another recession. We have seen numerous proposals floated that have teeth but which only gradually bring back fiscal discipline. But it is difficult to talk rationally about a national debt management plan when even the smallest unexpected reduction in the deficits leads to demands for more government stimulus. We now have a window of opportunity to restore competitiveness to our US economy. Having a larger national debt is not the route to that competitiveness.