Deficit Reduction

Ceteris paribus -- other things equal -- is often a heroic assumption. In reality, other things always change.

"The most visible and costly economic problem in this country today is the large number of people who can't find jobs." --  CBO chief Doug Elmendorf

   After due deliberation, the experts at the Congressional Budget Office have advised in their official report to Congress that there are two ways to deal with a budget deficit.:
   A/ Increase revenue (raise taxes), or
   B/ Reduce expenses (cut benefits).

   Really? Who woulda thunk it! Of course, when dealing with the mental giants in Congress, sometimes it's necessary to put things in as simple a form as possible. Not to say simplistic.
   The real issue, then, is not the verity of the analysis and recommendations, but getting the message understood by members of Congress. And in a wider sense, the problem is in getting Congress to act.
   The federal budget deficit, regardless of whether it is considered a major problem or an easy way to cope with economic problems, is not an unsolvable problem. In fact, it is not even a looming catastrophe, as some proclaim.
   We have ten years, at least, according to the CBO report, before the issue becomes even remotely serious. Even so, there are steps that can and should be taken soon to avert any issue that has even the potential to become serious.
   "In coming decades," said the CBO, "the aging of the population, rising health care costs, and the expansion of federal subsidies for health insurance will put increasing pressure on the federal budget." All true, but ....
   In just six years, by 2020, the CBO report added, assuming no change in current laws, federal spending "would drop to its smallest percentage of total output in more then 70 years," and revenue would be at its highest percentage, on average, over the past 40 years. Except, of course, outlays for Social Security and health care programs, the CBO noted. And if nothing is done, federal debt would rise from its present 72 percent of GDP to more than 100 percent 25 years from now, according to CBO projections.

   So to meet the challenge, assuming the challenge must be met, of lowering the total debt by 2 percentage points by 2038, Congress can trim $2 trillion from spending deficits during the next decade, and keep it that way afterward. This trimming plan, however, "would require significant increases in taxes, significant cuts in federal benefits or services, or both," the CBO said.
   The consequences, however, can be hazardous to the economy. Already, the nation is 5 million jobs short of where it could be, as well as "the most abrupt fiscal tightening that has occurred since the end of World War II," the CBO said, "as the federal deficit shrank from about 10 percent of Gross Domestic Product in fiscal year 2009 to about 4 percent in 2013."
   So while this belt-tightening has slowed the rising of federal debt, "it also has slowed economic growth," said the CBO. Some tradeoff.
   The economy has not yet fully recovered from the Great Recession, and millions of people are still out of work. Another 1.3 million have just lost their unemployment compensation benefits, and many more soon will join that group. And with no money coming in, a family cannot spend on necessities such as food, clothing and shelter. When families don't spend, stores have less revenue. When stores have less revenue, they trim costs by laying off workers, and pay less in taxes. When more people join the ranks of the unemployed, they too cut back on purchases. And when people and stores suffer from lower revenue and spending, less money goes to the government as tax revenue. When the government has less tax revenue, it can either trim expenses or practice deficit spending.
   And around and down we go. That vicious cycle has happened repeatedly many times in the past, as fiscal conservatives insist on balanced federal budgets, with no deficits and no debt.
   So there is a choice. The super-wealthy are to a large extent unaffected by government spending deficits -- except that lower taxes mean they have more to spend on luxuries -- but as government hacks away at assistance programs, the folks who depend on such programs for short-term survival until more jobs open up -- will suffer.

   In summary, eliminating deficit spending and balancing the federal budget can be done, but the price would be high and the consequences great.
   Those who say the price is reasonable are not those who would be paying it.