Sense and Nonsense About Federal Deficits and Debt

In the short run, the Bush tax cuts were one of the largest and best-timed uses of fiscal policy in history, helping to prevent a much worse downturn (but it would have been better still if the tax rate cuts had been immediate and real spending controls enacted simultaneously to take effect well into the economic expansion). In the medium run of five-to-ten years, the CBO projects gradually declining deficits and a debt-GDP ratio that rises slightly to peak at about 40% in two or three years, and then stabilizes for the rest of the decade through 2014 even as the tax cuts are made permanent, so long as the post-1998 splurge in non-defense discretionary spending is slowed substantially. This is hardly a debt spiraling out of control. The deficits will reduce domestic investment, but less than dollar-for-dollar. The effect is important, but hardly a cause for hysteria. Of course, President Bush’s tax cuts and Senator Kerry’s spending increases have ramifications well beyond the next decade, when fiscal pressures will become even more pronounced. In the long run of decades, the deficits in Social Security and Medicare are projected to be much larger than the unified deficit in the next ten years. Standard projections exceed fifty trillion dollars in present value, but may overstate the problem by assuming quite modest long-run annual growth, increases in health care outlays far in excess of GDP growth for the better part of a century (the only way that will happen is if the health benefits are sufficient for citizens to want to spend that much), large real benefit increases in Social Security, and continuous tax cuts to offset real bracket creep and the AMT. But even with less stark projections, there would still be large deficits and large tax increases looming. To avoid them, continuously rigorous spending control and major program reform is essential.