Columns » Ernest Dumas

Budget balancing


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nLet's pretend that the public is genuinely outraged at the big federal budget deficits — $1.4 trillion for fiscal 2009 and $1.3 trillion for the year just ended — and that the new tea-party Congress is hell-bent on fixing them.

Neither is true, but if they were, how hard would it be to get the budget in balance?

Not as hard as you imagine, given a small quotient of political courage, and not nearly as hard as the president's deficit-reduction commission makes it out to be.

First, you would excise the past 10 years from history and then — well, you actually would pretty much have it done.

Oh well, we can't reverse history, but the mental exercise helps us see the path to glory.

At this time 10 years ago we had enjoyed a budget surplus of $236 billion for fiscal 2000, the third budget surplus in a row and the first time since the late 1920s that we had consecutive surpluses. In the new fiscal year, which President Clinton was handing off to George W. Bush in two months, the nation would experience its last surplus, $128 billion, down a little from 2000 because the country would slip into a mild mid-year recession as Bush put his economic plan into action. Still, government and private economists were forecasting huge surpluses far into the future.

Clinton was paying down the national debt and talking about using the surpluses to lengthen the solvency of Social Security, which was forecast to exhaust its still-growing reserves by around the middle of the new century. The U. S. economy had withstood fiscal crises around the globe the previous eight years and created a record 22 million jobs. That seems so implausible now, but that was the enviable situation we were in.

What happened?

Start with Bush's big 2001 tax cuts, which went mainly to people with high incomes, and the succeeding smaller tax revisions through 2004. The tax cuts were supposed to stimulate so much growth that tax receipts would remain steady and, in fact, grow. That did not happen. The government's income fell sharply and did not again reach the level of 2000 for five years. Job growth was the most anemic for any five-year period since the Great Depression.

By the fall of 2007, the last year before the great recession, the trifling growth had brought the government back to the point that it was running a general-revenue deficit of only $430 billion (it had been $568 billion by Bush's third year, 2004). So that is where we start in computing the current deficit: $430 billion, conservatively, from the tax cuts.

Bush started two wars and, believing both would be short, he financed them with borrowing. Military spending rocketed from $281 billion in 2000 to $594 billion in 2008. Add another $300 billion to the annual deficit.

The Republican Congress and the president in 2003 adopted the Democrats' idea of insuring us old folks' prescription drugs and threw in their own idea of subsidizing elderly Medicare recipients if they would purchase coverage with private insurance companies. Health and Human Services spending surged from $505 billion in 2003 to $700 billion in 2008. The new health-insurance law will recover some of that starting in 2014 but uses it to pay for expanded drug coverage and other Medicare improvements rather than lowering the deficit.

Then came the recession in December 2007 and the financial collapse in 2008.

The government's income fell by $400 billion in 2009 while the costs of recession—extended unemployment relief, safety net programs like food stamps, the bank and auto bailouts and President Obama's spending to jump-start private consumption and preserve jobs—provided the final surge to the $1.3 trillion deficit for 2010.

So how do we get back?

A return to the modest economy of three years ago will pick up that $400 billion of lost revenue from 2007, leaving us with a deficit $900 billion or so. Nothing that the Congress is apt to do now will put any verve in the economy, certainly not more tax cuts as recent experience has shown. It will have to do it on its own, as it always has.

What about letting all the Bush tax cuts expire, not just the top marginal rate for the very rich, the estate tax and capital gains, as Ronald Reagan's budget czar, David Stockman, has suggested? Wait maybe another year, for the economy to stengthen.

Letting the rich's extra tax cuts expire would go a long way toward the goal. Everyone else's tax cuts were small, but 130 million tax filers paying a little more, as we were doing in 2000, can mean a lot of money and a lot of deficit reduction.

That won't happen because the public has been led to believe that their taxes have gone up and up and up, when the opposite is true, at least with federal income taxes. But, remember, this is just an academic exercise.

That leaves the wars and military bloat. President Obama could remedy that and he or his successor eventually will, but only after the folly of the wars has finally been proven beyond a shadow of a doubt.

That leaves the Medicare and Social Security deficits, the latter of which looms in another 25 years or so. Social Security should be fixed, and easily can be with some of the adjustments that the chairs of the deficit commission propose, but it should be done to fix Social Security and not to repair the rest of a broken fiscal system.


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