FRIZ
September 6, 2003, 10:08 PM
U.S. News & World Report
9/15/03
The funny thing about holes
By Mortimer B. Zuckerman • Editor-in-Chief
http://www.usnews.com/usnews/issue/030915/opinion/15edit.htm
My 6-year-old daughter has a little puzzle. What is it that the more you take away, the bigger it gets? The answer is a hole. When applied to the United States, it's a fiscal hole. This year, after tax cuts took away so much revenue, our national deficit will be more than $400 billion. Next year, we will be in a hole deeper by about an additional $80 billion. A recent report by the nonpartisan, independent Congressional Budget Office makes it clear we are not going to get out of this hole anytime soon. The most likely prospect is for big deficits through the end of the decade before we begin to see a surplus again. While we're deep in deficit land, however, government debt and government interest payments will double as a share of our gross domestic product.
The gravity of the situation is that the $5.6 trillion budget surplus that we estimated would accrue over the decade when the Bush administration entered office has now, in just two short years, morphed into a $5 trillion-plus deficit. This is not scare talk. The study assumes that the current tax cuts, which have sunset provisions, will continue; that a prescription drug program will be added to Medicare; and that the alternative minimum tax will be amended. These assumptions are prudent. In fact, the study may be too optimistic: It assumes that discretionary spending by Washington will grow only at the rate of the projected average for inflation of 2.7 percent per year, when it has been growing by 7.7 percent during the past five years. If the latter happened, the deficit in 2013 would be a staggering $1 trillion. These deficits would be even larger if we weren't applying the Trust Fund surpluses, which were supposed to be dedicated to pay future Social Security and Medicare expenses. And since 77 million baby boomers will start collecting Social Security benefits in five years, and Medicare benefits in eight years, locking in these deficits with tax cuts could not have happened at a worse time.
Gobble, gobble. Our choices are grim. We can either raise taxes dramatically to keep Social Security payments flowing or take an ax to benefits and watch the elderly become poor once again. The shame here is that we are shifting this burden to the next generation--not our grandchildren but our children, because this is all ordained to happen over the next two decades. What's more, these deficits will devour the money we might otherwise be investing in productive assets to stimulate the economic growth required to meet the liabilities we have assumed.
Virtually every economic study shows that the greater the deficit, the higher the interest rates. Abandoning fiscal discipline eventually erodes capital spending, lowers productivity growth, and forces harsher tax or budget-cutting choices. And there's simply no way to gloss over the numbers. Our state governments and local governments have learned this to their chagrin, for Washington has pushed the fiscal problems of its creation down to them. The result? The states now face a fiscal crisis that will erode their ability to pay for schools, hospitals, highways, and prisons.
Almost as alarming as the yawning deficit hole is the administration's apparently blithe lack of concern about it. Thus the deficits are referred to as "moderate" and "manageable," when in fact they are neither. Some in this administration seem to think that we don't have to choose, as President Eisenhower did, between guns and butter. They are not only willing to indulge in guns and butter, as President Johnson did during the Vietnam years. They're going for guns, butter, and tax cuts.
Americans knows better than this. They understand that these deficits will come to haunt our future because they violate the basic principles of public finance. They understand that when you cut taxes and cut revenues in the short run, you only foist the burden of higher taxes on future generations. Which is why only 29 percent of Americans agreed that the prior tax cuts were the best way to increase economic growth and create jobs, while 64 percent said there were better ways to improve the economy. (Only 1 in 4 thought the first Bush tax cut gave the economy a boost.)
For the moment, we are importing $500 billion to $600 billion a year in foreign capital to meet our current account deficit and help fund our deficit. For the first time in history, America is paying out to the rest of the world more than it receives in interest, dividends, and other investment income. We are working for foreign investors. If America's pride was in being self-sufficient, it has now built into its fiscal future a structural deficit that literally will make us depend on how the world responds to our budget deficit.
Know the First Law of Holes? When you're in one, stop digging.
9/15/03
The funny thing about holes
By Mortimer B. Zuckerman • Editor-in-Chief
http://www.usnews.com/usnews/issue/030915/opinion/15edit.htm
My 6-year-old daughter has a little puzzle. What is it that the more you take away, the bigger it gets? The answer is a hole. When applied to the United States, it's a fiscal hole. This year, after tax cuts took away so much revenue, our national deficit will be more than $400 billion. Next year, we will be in a hole deeper by about an additional $80 billion. A recent report by the nonpartisan, independent Congressional Budget Office makes it clear we are not going to get out of this hole anytime soon. The most likely prospect is for big deficits through the end of the decade before we begin to see a surplus again. While we're deep in deficit land, however, government debt and government interest payments will double as a share of our gross domestic product.
The gravity of the situation is that the $5.6 trillion budget surplus that we estimated would accrue over the decade when the Bush administration entered office has now, in just two short years, morphed into a $5 trillion-plus deficit. This is not scare talk. The study assumes that the current tax cuts, which have sunset provisions, will continue; that a prescription drug program will be added to Medicare; and that the alternative minimum tax will be amended. These assumptions are prudent. In fact, the study may be too optimistic: It assumes that discretionary spending by Washington will grow only at the rate of the projected average for inflation of 2.7 percent per year, when it has been growing by 7.7 percent during the past five years. If the latter happened, the deficit in 2013 would be a staggering $1 trillion. These deficits would be even larger if we weren't applying the Trust Fund surpluses, which were supposed to be dedicated to pay future Social Security and Medicare expenses. And since 77 million baby boomers will start collecting Social Security benefits in five years, and Medicare benefits in eight years, locking in these deficits with tax cuts could not have happened at a worse time.
Gobble, gobble. Our choices are grim. We can either raise taxes dramatically to keep Social Security payments flowing or take an ax to benefits and watch the elderly become poor once again. The shame here is that we are shifting this burden to the next generation--not our grandchildren but our children, because this is all ordained to happen over the next two decades. What's more, these deficits will devour the money we might otherwise be investing in productive assets to stimulate the economic growth required to meet the liabilities we have assumed.
Virtually every economic study shows that the greater the deficit, the higher the interest rates. Abandoning fiscal discipline eventually erodes capital spending, lowers productivity growth, and forces harsher tax or budget-cutting choices. And there's simply no way to gloss over the numbers. Our state governments and local governments have learned this to their chagrin, for Washington has pushed the fiscal problems of its creation down to them. The result? The states now face a fiscal crisis that will erode their ability to pay for schools, hospitals, highways, and prisons.
Almost as alarming as the yawning deficit hole is the administration's apparently blithe lack of concern about it. Thus the deficits are referred to as "moderate" and "manageable," when in fact they are neither. Some in this administration seem to think that we don't have to choose, as President Eisenhower did, between guns and butter. They are not only willing to indulge in guns and butter, as President Johnson did during the Vietnam years. They're going for guns, butter, and tax cuts.
Americans knows better than this. They understand that these deficits will come to haunt our future because they violate the basic principles of public finance. They understand that when you cut taxes and cut revenues in the short run, you only foist the burden of higher taxes on future generations. Which is why only 29 percent of Americans agreed that the prior tax cuts were the best way to increase economic growth and create jobs, while 64 percent said there were better ways to improve the economy. (Only 1 in 4 thought the first Bush tax cut gave the economy a boost.)
For the moment, we are importing $500 billion to $600 billion a year in foreign capital to meet our current account deficit and help fund our deficit. For the first time in history, America is paying out to the rest of the world more than it receives in interest, dividends, and other investment income. We are working for foreign investors. If America's pride was in being self-sufficient, it has now built into its fiscal future a structural deficit that literally will make us depend on how the world responds to our budget deficit.
Know the First Law of Holes? When you're in one, stop digging.