A Deficit of Fiscal Prudence
The economy zoomed to an 8.2% growth rate last quarter. The stock market has crept above the 10,000 barrier. Consumers are spending freely. So what could spoil the holiday’s good economic cheer? Plenty, according to separate warnings from the General Accounting Office and the Congressional Budget Office. Looming budget deficits threaten long-term economic recovery. Unless taxes are raised, the CBO’s new “Long-Term Budget Outlook” says, “current spending policies will probably be financially unsustainable over the next 50 years.” And even the current news is shaky: Durable goods orders by businesses unexpectedly fell 3.1% in November.
Already the combination of tax cuts and increased spending has plunged the U.S. back into massive deficits, with an additional $500 billion in red ink likely in 2004. Pork-barreling is unconstrained: In January, the Senate is scheduled to take up the overdue omnibus $328.1-billion spending bill, which contains such vital necessities as $325,000 for a swimming pool in Salinas, Calif., and $75,000 for a North Pole Transit System in Alaska. The conservative Heritage Foundation estimates that federal spending has increased by 16% in the last two years and that it has gone from $16,000 per household to $20,000 per household in the last four years.
But the biggest problem remains the impending retirement of the baby boom generation. According to the GAO, unless Congress starts to attack the budget deficit, spending will have to be slashed by 35% in 2030 to maintain current services to retirees, or taxes raised by an inflation-adjusted 40%. The CBO report says the number of adults 65 or older will double during the next 30 years, while the number of adults under 65 will grow by less than 15%. Atop all this is the new $400-billion prescription drug benefit.
The deficit numbers are so big they are eye-glazing, but the potential harm to the economy is concrete. The larger the government’s debt service payments, the more private capital is invested in government securities and the less is available for business investment. The deficit also means that the Federal Reserve will sooner or later raise interest rates to finance the debt, which will slow economic growth. The CBO report even warns of a possible “economic crisis” in which foreign investors stop financing America’s debt and stock markets collapse.
Congress can avoid an economic Dunkirk by looking to the recent past. In the 1990s Congress managed to go from budget deficits to surpluses by insisting on spending caps and “pay as you go” provisions for tax cuts and entitlement expansions.
By combining the increased revenue of the short-term economic recovery with at least enough discipline to stop cutting taxes, Congress can start taking the next generation off the hook for this one’s profligacy. The tax-cut punch bowl is empty.
The view from Sacramento
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