A Mounting Deficit of Responsibility
By Howard Gleckman
Once again, Washington is resuming the old "guns vs. butter" debate that has been around at least since the Civil War. The question: Should a wartime government raise taxes to pay as it goes for critical programs? Or should it slash domestic spending? Or should it simply borrow money to make good on its bills? In the '60s, President Johnson opted to fight a costly conflict in Vietnam while launching an ambitious war on poverty. The unhappy result: A nasty burst of inflation that hobbled the economy for years.
Today, lawmakers face the rising cost of wars on terrorism and Iraq, President Bush's love for big tax cuts, and a bipartisan thirst for spending. And when Congress approved a budget blueprint on Apr. 11, the bottom line was clear: Confronted with choosing between guns or butter, Washington is on its way to choosing both.
That's unfortunate, because today's fiscal spending spree will have profound consequences for the nation's ability to support the retirement of 80 million baby boomers -- the first of whom will begin collecting Social Security checks in just five years. Washington must get its fiscal house in order before that happens. But, says Robert Bixby, executive director of the antideficit Concord Coalition, "We're squandering that opportunity."
True, Congress seems to be scaling back Bush's tax agenda. But that doesn't mean fiscal sanity is settling over the Capitol. A tax cut of between $350 billion and $550 billion would only add to what has been the biggest bout of tax-cutting in modern U.S. history. At the same time, lawmakers are preparing to approve costly new Administration spending requests, including a $400 billion Medicare drug benefit and a 35% increase for the Pentagon through 2013.
More deficit spending may give a sluggish economy a near-term jolt. But by cutting taxes and boosting spending on top of already hefty deficits, Bush and Congress are playing a dangerous game. Unlike the '60s, lawmakers can now hear the ever-louder ticking of a demographic time bomb, as those millions of boomers age.
And by spending and tax-cutting madly now, Congress and the Bush Administration are almost guaranteeing the need for draconian remedies down the road, in the form of huge tax increases or sharp cuts in government services. "At some point we're going to have to face up to the problem," says American Enterprise Institute economist Kevin Hassett.
In 2013, the final year of Congress' budget, the feds expect to spend more than $1.6 trillion on health and retirement programs for seniors, at least $525 billion for the military, and nearly $300 billion for interest on the debt. All told, just this handful of obligations will absorb more than 13% of total gross domestic product.
That's not all government does, however. It also has to provide for homeland security, national parks, food stamps, emergency aid for victims of floods, and more. Worse, Congress and the White House may be overestimating federal revenues and underestimating spending. For instance, rejiggering the alternative minimum tax -- a levy that will clobber nearly 36 million taxpayers by 2010 if Congress does nothing -- will cost at least $700 billion in revenues, according to the Urban-Brookings Tax Policy Center.
"UGLY TO BEHOLD."
What's more, efforts to cut spending are going nowhere. When the House Budget Committee tried to balance the budget by trimming more than $450 billion from programs such as Medicare, Medicaid, and farm aid, the plan was eviscerated by GOP leaders. "We are in the midst of a Republican spending spree that's ugly to behold," says Stephen Moore, president of the Club for Growth, a conservative Washington-based advocacy group. "We could see $500 billion deficits for years."
Economists Alan Auerbach of the University of California at Berkeley and William G. Gale of the Brookings Institution estimate a long-term fiscal deficit of between 4% and 8% of GDP -- a level not seen since the U.S. was paying off the cost of World War II. They reckon it will require tax hikes or spending cuts of 20% to 38% to bring the budget back into balance.
And the longer you look into the future, the worse the numbers get. In 2040, even the White House estimates that deficits will skyrocket to 8.8% of GDP. By 2060, they'll double again, to 17.5%, if nothing is done.
THE GRAY PERIL.
Moore and others argue that the only solution is to grow out of deficits. That's the theory behind big tax cuts. But a recent study by the Congressional Budget Office suggests that the Bush budget would create little or no growth premium. Why? Because the tax cuts aren't offset by spending reductions or increases in other taxes. And the huge resulting deficits would shift trillions of dollars from productivity-enhancing private investment to Treasury bonds as the debt piles up.
The Hill budget agreement would balloon today's $3.8 trillion public debt to $5.4 trillion by 2013. But it's worse than that. Every year the government is in deficit, it "borrows" Social Security payroll taxes to fund its operations. Add the interest it owes to the retirement fund for those loans, and the total government debt will hit $12 trillion in 10 years.
Every penny of that money has been promised to those soon-to-be retirees. But instead of getting its books in shape to meet these staggering unfunded obligations, Washington keeps digging the hole deeper. The war may have distracted the public's attention from this game -- and given pols the opportunity to pander to everyone's desires. But it has only made the problem worse. And someday soon, politicians will have to confront it.
Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views in Washington Watch, only on BusinessWeek Online
Edited by Douglas Harbrecht