Time to Get Serious About the Deficit

I don't need to tell you what I think of the budget: it's disastrous.  The minimum projected budget deficit for the next 10 years is 2.9% of GDP in 2018.  Now, 2.9% of GDP is--just barely--sustainable; it's about the maximum deficit that we can run and not drive the government's fiscal ship onto the rocks.  But when that's the best you can do--when you're only getting that low at the tip-top of the business/tax cycle--you're in deep trouble.  What happens when there's another slowdown?


Conservatives will be very unhappy that the budget permanently ratchets spending up to 23% of GDP.  But liberals shouldn't be too happy either--the president still hasn't found a way to get tax revenues above 20% of GDP.  And us deficit hawks--well, I'll be out back with a fifth of Ardbeg if anyone needs me.

Even more terrifying is how much of the big stuff this budget pays for.  Originally, I was going to write this post about the president's decision to include multi-year "fixes" for the Alternative Minimum Tax and the Medicare rules that would otherwise slash doctor reimbursements by almost 25%.  I assumed that the president was doing what George Bush had done before him--taking what financial analysts call a "big bath".  That is, when you have to report a loss, you deliberately make that loss as big as possible by including every possible revenue impairment or cost that you think you might suffer.  That way, when it's not as bad as you thought, you can reverse the pessimistic charges and show a nice gain.

Before the Bush administration, the OMB's projections tended to track the CBO's.  But under Bush, they were routinely more pessimistic.  Then when things got better, the administration could say that things were improving faster than expected.  Or at least, I always assumed that was the reason.

But this is much worse.  When I looked into the budget, I found that these fixes were paid for--the AMT fix is paid by a 30% cut in itemized deductions for high earners.  The "doc fix" is paid for by some sketchily outlined cuts to payments for other providers, including proposals to cut the exclusivity period for biologic drugs from 12 years to 7 and restrict pharma's ability to head off patent challenges from generic manufacturers with side payments.  This is what the budget looks like when big, expensive temporary fixes are paid for and the president includes a temporary spending freeze.  This is the best case scenario.

And it's not a good case.  Because of course the new restrictions on drugmakers have failed Congress before, as has deduction phaseout and shorter biologic exclusivity.  Once this budget hits Congress, the numbers may get even bigger and scarier.  As the FT notes in its headline, "deficit reduction targets unlikely to be hit."  Moreover, those "fixes" are stacked to expire just after Obama (in theory) gets re-elected.  The budget does not reflect the fact that he and Congress are going to want to do them all over again then.

I was a laconic hawk when the deficits shot up in 2008, 2009, 2010.  A few years of deficits in an unprecedented crisis weren't going to kill us; we had time to get them under control.

But I'm starting to think that it's time to panic.  This deficit is $700 billion higher than the CBO projected in August 2009, of which $500 billion is lower tax revenues, and $200 billion is new spending.  It's also $500 billion less revenue and $100 billion more spending than the CBO was expecting as late as August of last year, thanks to the extension of the Bush tax cuts.  For all that I keep hearing about deficit reduction and PAYGO rules, somehow those "fiscally responsible" Democrats have given us the largest peacetime deficit in history, one that keeps growing beyond all expectations--and for all their alleged worries about the budget deficit, so the Republican role in all of this has been to goad Democrats into cutting taxes even further, so that the wealthiest earners could enjoy their fair share of our collective fiscal insanity.

I know the arguments for stimulus, but at this point, I don't think we can afford the luxury of a more stimulating economy.  Our politicians can't be trusted to do the right thing later; we need to make them do it now.  If we let them, our politicians will give us deficit reduction that is all jam yesterday and jam tomorrow, but never jam today--and we'll end up in an ugly fiscal crisis that will force ugly tax hikes, cruel and sudden service cuts, and ugly debt service requirements on all the folks on both sides who are hoping that if they delay long enough, they can somehow get a better deal for their side.  Unless politicians get serious about deficit reduction right now--not seven years in the future--they're going to tax-cut-and-spend us straight into the poorhouse.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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