How to Worry About the Deficit: (1) Don't; (2) Wait a Few Years; (3) Then Worry About Healthcare Costs

Today, there is no deficit crisis. Tomorrow, there will be no deficit crisis. But in ten years, we will have a massive problem of exploding health care costs. Now that's a crisis to worry about.

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We Americans take on debt with alacrity, but we hate to see our government do so. At least that's what we tell the pollsters. One of the most prominent, but least beloved, legacies of the Great Recession was the spectacular increase in the federal budget deficit, which soared from a comparatively benign $161 billion in fiscal year 2007 to a mindboggling $1,413 billion in fiscal 2009.

The federal government borrowing more than a trillion dollars a year? That's a stupefying number. It sounds not just profligate but dangerous, especially if your views on the deficit are based on false analogies to a family's finances. And it's true that levels of public debt tend to push up interest rates--not just for the government but for everyone. That spells less business investment, less homebuilding, fewer automobile sales, and so on.

But the logical solution for now comes in three parts: one for right now, one for the next decade, and the last for the very long run.

RIGHT NOW: With the economy still so weak, the case for near-term fiscal contraction is weak as well. We shouldn't kick away the fiscal crutch until the patient is ready to walk. If I am allowed to indulge in wishful thinking, a two-pronged policy that combines modest fiscal stimulus up front with serious deficit reduction thereafter would be even better.

THE NEXT DECADE: Strange as it may seem with trillion-dollar-plus deficits for four years running, the U.S. government still has no short-run borrowing problem. On the contrary, investors all over the world are still clambering to lend us money at negative real interest rates. In purchasing power terms, they are willing--nay, eager--to pay our government to borrow from them!

According to the CBO's January 2012 projections, the federal deficit as a share of GDP will shrink from 9 percent of GDP in fiscal 2011 to roughly 5 percent of GDP in fiscal years 2015-2018, without any further policy actions. To be sure, 5 percent of GDP is still too high. But coming from the stunning 10 percent of GDP in 2009, it's a long way down. A reasonable target for deficit reduction over the next decade might be 2 to 3 percent of GDP, starting perhaps in fiscal 2014.

THE VERY LONG RUN: The truly horrendous budget problems come in the 2020s, 2030s, and beyond. But while the long-run budget problem is vastly larger, it is also far simpler, for two reasons. The first is that the projected deficits are so huge that filling most of the hole with higher revenue is simply out of the question. Spending cuts must bear most of the burden. The second is that there is only one overwhelmingly important factor pushing federal spending up and up and up: rising health care costs.

Presented by

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve.

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