Cal Berkeley Democrats

Perspective on the Deficit

Last week, the Obama administration announced a deficit projection of $1.6 trillion. At 11.2% of GDP, this would be the largest in percentage terms since World War II. Moreover, the administration estimates a $9.05 trillion deficit over the next ten years.

Unsurprisingly, Republicans are using these numbers as political ammunition. House Minority Leader John Boehner commented, “the Democrats’ out-of-control spending binge is burying our children and grandchildren under a mountain of unsustainable debt.” However, Boehner’s fiscal hawkishness is newfound. Over the past eight years it was his party which squandered our surplus, and it was Vice President Cheney who insisted, “Reagan proved deficits don’t matter”.

As President Obama claims, he inherited his troubles. The new numbers reflect not increased spending, but rather the state of our economy. During recessions, revenues fall with income and expenditures rise with unemployment. These external trends, which began well before Obama’s term, are responsible for our forecast. In fact, his policies explain only 16% of the deficit. Blaming him, while ignoring the economy and giving him no time to fix it, is ingenious and unfair.

Regardless of blame, though, the deficit understandably gives people pause. However, it must be understood in context. Over the next ten years, the U.S.’s debt as a share of GDP will rise from 33 to 68%. While this may seem staggering, in relative terms it is far from apocalyptic. Even now, Japan’s debt-to-GDP ratio is 140%. Similarly, Italy’s is 104%. Even the United States, after World War II, faced a ratio of 120%. Yet, far from being smothered, our economy experienced the longest, most widespread growth in its history.

How was this possible? After 1945, the U.S. managed to restrain its spending while expanding its economy. As a result our debt-to-GDP ratio decreased, as did the share of the budget needed for debt service. Put simply, we grew our way out of the problem. If spending lays the foundation for future growth, as it did after World War II, then we need not panic.

Danger arises when we spend frivolously without investing wisely. For example, the Iraq war could waste $3 trillion with nary a boost to productivity. On the other hand, President Obama’s priorities—energy, education, and infrastructure—offer a new foundation for growth. Investments in energy could create literally millions of “green jobs”. Investments in our schools would prepare students to compete in the global knowledge economy. Our infrastructure, too, is important; the Interstate Highway System returned $6 for every $1 spent on it. In order to manage our debt we need growth, and we must make the public policy decisions to achieve it.

So, what can we do? To be sure, we must rein in spending. This includes the single biggest driver of the deficit, health costs. According to the nonpartisan Congressional Budget Office, “rising costs for health care represent the single greatest challenge to balancing the federal budget”. If current trends continue, by 2040 Medicare and Medicaid will consume a whopping 15% of GDP. Health care is a budgetary time bomb; the status quo is unsustainable. If it restrains costs, reform will be wise. While health care may be a moral issue, it is undoubtedly a fiscal one.

Secondly, to reduce the relative burden of deficits, we must grow our economy. This will require investments in energy, infrastructure, and especially our schools. In fields like these, we should not reject spending prima facie. Instead we must take the long view, and realize that current cutbacks mean future failures.