Deficits Don’t Matter? The Hell They Don’t

In Brian S. Wesbury’s latest column at the American Spectator, he makes the case that deficits don’t matter. I think the last three paragraphs do a pretty good job of summing up the article…

“WHILE DEFICITS ARE CLEARLY back for the time being and the just-released Bush budget forecasts a peak deficit of just 4.5 percent of GDP in 2004, this deficit is small compared to the past. Between 1982 and 1986, the federal budget was in deficit by an average of 5.0 percent of GDP. The economy continued to grow, with low inflation and falling interest rates, throughout the 1980s, and there is no reason to believe that deficits in the 2000s will result in any different outcome.

Some may say that it is different this time because baby-boomers are starting to retire and Social Security and Medicare are about to hit the wall. This analysis is misguided. These programs are financially flawed and will eat our economy alive unless they are fundamentally restructured. If not, then government spending will soar and truly crowd out the private sector. No amount of government surplus will pay for these programs.

I doubt this is the last time I will have to explain these realities about budget deficits, but I hope I have set the record straight this time. Reagan taught us right — deficits don’t matter, spending does.”

Interestingly enough, I agree with most of what Wesbury says. The current deficit is lower percentage wise than the one run by the Reagan administration, Social Security and Medicare are such messes that they’ll have to be reformed no matter what, the economy can hum along just fine despite running a large deficit, etc, etc, etc.

There’s just one problem with that theory and it’s one Wesbury and many other people conveniently ignore. That problem being: at some point your debt gets too big to manage and your economy nosedives into the pavement a la Argentina. Is that going to happen next week, next month, of next year? No. But, eventually the check always comes due and it would be a catastrophe if we can’t pay it.

Now the standard response to this is that we can cut taxes & stimulate the economy which will produce more tax dollars, allow us to outgrow the deficit, run an ever increasing surplus, and eventually pay off the debt. And I agree that yes, that is theoretically possible. But of course, there is a catch: for that to work, it requires that the government show some restraint and not continue to spend more and more of our tax dollars on every useless government program that comes down the pike.

We managed to pull that off in the Clinton years only because the Republicans in Congress managed to stymie the overwhelming majority of new spending Clinton wanted and because of the truly massive cuts in defense spending after the Cold War ended (Wesbury notes that defense spending dropped from 5.4% of GDP to 3% of GDP).

Would we see the same reductions in spending if let’s say Kerry were elected instead of Bush? Absolutely not. There’s no way Kerry could slash defense spending the way Clinton did in the middle of a war on terrorism. Furthermore, although divided government would undoubtedly slow spending, I have become convinced over time that since triangulation is the political philosophy du jour, we’re just not going to see the Republicans currently in office putting their foot down on spending the way the GOP did in the nineties. That’s why I think it’s essential that we put some form of Balanced Budget Amendment in place to legally obligate the Federal government to stop spending so much of our money.

But in any case, don’t let anyone tell you that we can continue running the same sort of deficits that we are today, ad infinitum, because what we’re currently doing is unsustainable over the long-term. If we don’t get a handle on our spending, we’re going to find out how much deficits really do matter the hard way at some point in the next decade or two….

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