Business | Economy
Trillion-dollar budget spree is road to ruin, not rally
We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the US government to borrow too much money.
- Bloomberg
- Published: 23:42 January 13, 2009
- Photographers look over the site of the Inauguration on Capitol Hill in Washington.
- Image Credit: AP
New York: We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the US government to borrow too much money.
The Congressional Budget Office (CBO) last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion (Dh 4.4 trillion), roughly triple what it was in 2008. We should hope we are that lucky. The deficit will be that low only if Uncle Sam dies and goes to heaven.
Make no mistake, the CBO forecast is the lowest of lowball estimates. It excludes President-elect Barack Obama's proposed stimulus package and understates the likely costs of the Iraq war, among other things.
A comprehensive estimate that accounts for all "known knowns," as Donald Rumsfeld might say, would be higher by about half a trillion dollars. If the stimulus bill passes, the deficit next year will be $1.7 trillion.
A trillion is a strange and difficult number to contemplate, but thinking through the economic implications of that massive deficit requires doing so.
The number itself is one million millions. A government that started with a balanced budget could run a $1.7 trillion deficit by mailing 1.7 million households $1 million, or 17 million households $100,000.
Or try this. The whole world's military spending in 2006 totalled a little less than $1.2 trillion. So next year's US deficit could cover that and still have $500 billion left over for building bridges.
Perhaps the most disturbing comparison is this one: When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.
How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 per cent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009.
The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 per cent higher. Of course, all that happened mostly on a Republican watch.
One reason the increase is so dramatic is the mystery of compounding. Each year, Congress passed pork-laden expenditure bills, which became part of the long-run baseline the minute they became law.
Each time that the federal government wasted a billion dollars, it created budget space to waste $1 billion again and again, ad infinitum.
That's perhaps the scariest fact about next year's budget. The skyrocketing spending of 2009 will be the CBO baseline for every year after that. It will be easy to provide health care to everyone; the budget space will be blocked out.
Indeed, Congress can spend with impunity in years to come, covered by the protective shroud of the CBO baseline that this year delivers.
We can ride big government spending and trillion-dollar deficits all the way to 2017, when the Social Security trust fund itself starts running deficits.
This year may establish a government-spending black hole with gravity strong enough to suck the US economy over the event horizon. Such a spending path has two possible endgames. Neither is pretty.
The Federal Reserve could print enough money to accommodate all of that debt, in which case the dollar will collapse and the US will be looking at a South-America-style run on its debt.
Or the US government could get its fiscal act in order with higher taxes. For that to happen, income taxes would approximately have to double.
While advocates of Keynesian-style stimulus are correct that this economy is terrible enough to warrant dramatic action, it is hard to understand how such a fiscal path might help.
So what if second-quarter gross domestic product blips up a little bit? What business is going to expand its operations with the mother of all tax hikes peeking over the horizon? If government spending provided such a wonderful boost to the economy, we would be in Nirvana already.
The only sensible path is for the US to put its long-term fiscal house in order. Without that, this year's stimulus will likely be a historic flop. .
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