In any other time and place, $642 billion would qualify as a lot of money. But in the Washington of 2013, it has been reduced to pocket change. When the Congressional Budget Office announced that it has cut its projected 2013 federal deficit to $642 billion — compared with 2012’s deficit of $1.1 trillion and an earlier 2013 estimate of $845 billion — there was an almost-palpable sigh of relief. The budget problem is taking care of itself. Congress and the White House can relax. No more self-destructive budget brawls. No more unpopular choices between tax increases and spending cuts.
Can we get real? For starters, $642 billion is serious money, and despite the modest improvements of the latest CBO report, the basic trends in federal finances remain the same. From 2014 to 2023, the government will spend $6 trillion more than it collects in taxes. The budget never comes close to balancing. Expanding spending on the elderly and health care continues to strangle the rest of government. As a share of the economy (gross domestic product), military and domestic discretionary programs (examples: drug approval, environmental regulation, Head Start, federal courts) drop about 40 percent from 2010 to 2023.
Nothing of consequence has changed. A few numbers have shifted slightly. That’s all. They moved in a favorable direction. Next time, they might go the other way. What’s also constant is the unwillingness of leaders of both parties, beginning with the president, to discuss budget choices candidly. The budget passed by the Democratic Senate barely touches entitlements for the elderly, which constitute the largest chunk of federal spending. The budget passed by the Republican House avoids a large tax increase only by making draconian and unrealistic spending cuts that would never pass Congress or be signed by the president.
But the latest budget figures do sharpen debate on one issue: do the deficits stimulate the economy — at least in the short run?
Many economists believe they do and, not surprisingly, they greeted the lower 2013 deficit estimate as bad news. The economy would have been stronger, they contend, if the deficit had been larger. Among the measures that trimmed the deficit and, arguably, hurt the economy are the end of the 2 percentage point cut in the Social Security payroll tax, higher income tax rates for wealthier households and the automatic spending cuts of the “sequestration.” The logic is simple: When private-sector spending is weak, the public sector must substitute.
But for how long? When do the pleasures of more debt turn into the pitfalls of more debt? To some extent, the argument that deficits provide short-term stimulus has spared its advocates the trouble of prescribing policies that would ultimately reduce deficits or balance the budget. Many — possibly most — economists believe that once the private sector strengthens, deficits no longer provide much stimulus. For example, the government’s borrowing may raise interest rates and curb consumer and business spending. The possibility that government deficits remain high when the Federal Reserve reverses its current bond-buying policies (so-called “quantitative easing”) could intensify upward pressure on rates.
So the latest deficit numbers, though interesting, settle nothing. They don’t provide a road map for long-term budget discipline or resolve the debate over the short-term effects of deficits. They do provide an excuse for both Congress and the White House to postpone genuine discussion and decisions.
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