Trillion-dollar deficits are not the answer

March 26, 2009

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

On Tuesday, President Obama suggested that his new proposed spending, if adopted by Congress, would be an investment that will pay for itself.

Mr. Obama declared: “We invest in reform that will bring down the cost of health care for families, businesses, and our government.” Such investments, he argued, will in the long run make the economy operate more efficiently.

Mr. Obama was optimistic about how his policy recommendations, if enacted, would play out.  But the nonpartisan Congressional Budget Office estimated that government spending and the deficit would grow steadily from 2012 through 2019, not only in dollars, but also as a percent of GDP.

After “bottoming out” at $658 billion in 2012—a level more than 40 percent above the highest deficit under the presidency of George W. Bush— CBO projects the deficit to reach $1.2 trillion in 2019, or 6 percent of GDP.  By 2019 government spending would take up nearly a quarter of GDP, far higher than at the peak of Iraq war spending, and the highest, except 2009 and 2010, since World War II.

Mr. Obama’s stimulus plan and budget are not one-time investments followed by years of reduced spending.  Instead, they form a platform for spending growth that continues into the indefinite future.  The vast majority of this spending is not what a well-run business or the Internal Revenue Service would count as investment—plant, equipment, and other tangible assets. Rather, most of the Obama spending would be for services.

Although Mr. Obama wants to spend and borrow more, a failed UK government’s bond auction earlier this week showed that investors are not always ready to finance the debt. And there are limits to how high taxes can rise before slowing an already fragile economy.

Alternatively, is it possible for Mr. Obama to cut spending?  Menus of changes in spending and taxes provided by CBO since 1978 suggest the answer is yes.  The latest complete volume of Budget Options was issued in February 2007, and another is due out soon.  A volume of health care options to both increase and decrease spending was published in December 2008.

CBO lists billions in savings in 10-year increments.  If only politicians had the willpower to choose among them, the budget might well be balanced. Let me assure readers that if only economists were elected to Congress, the deficit would shrink soon enough.  Of course, the economists might not be reelected.  But politicians try to woo different interest groups by spending money, with the ultimate cost falling on generations of taxpayers.

Here are a few examples of savings calculated by CBO, all over 10-year periods.

  • Social security benefits are now indexed for inflation using a formula based on wage levels rather than price levels.  Changing to a price index would result in a 10-year savings of $141 billion.  Gradually raising the standard retirement age, which will reach 67 in 2026, to allow for increased life expectancies would save another $86 billion.
  • Changing Medicaid payments for acute care services into block grants to states, and indexing these payments for price increases and changes in population, would save $556 billion.
  • CBO estimated that giving a voucher to purchase health insurance to every uninsured family within 200% of the poverty line—that’s below an income of $44,000 for a family of four—would cost $65 billion, a savings of $569 billion over the Obama plan, which calls for a down payment on a universal health insurance fund of $634 billion.  Double the generosity of the CBO voucher, and that’s still $500 billion less in spending than the president proposed.
  • Although Mr. Obama last year proposed creating a public health plan for uninsured Americans that looked like the Federal Employees Health Benefits Program, CBO calculated that replacing the FEHB with a voucher program would save $70 billion.

Other savings proposed by CBO range from $105 billion over ten years from reducing Federal aid to highways, to $13 billion from selling some Tennessee Valley Authority Electric Power assets, to $11 billion to eliminate Federal grants for wastewater and drinking water infrastructure, to savings from defense and agriculture.  All agencies are included.

In the name of investment, President Obama’s budget would increase the deficit by $4.8 trillion over the next decade.

He could serve us taxpayers better by carefully examining each line of spending and cutting the waste, as he promised us he would do during the campaign.

Click here to read a related opinion column, “To Pay for Vital Programs, Congress Must Make Tough Choices,” by Deborah Weinstein of the Coalition on Human Needs.

67 comments

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I’m buying the etf FAZ.
The stories of how things are not so bad, and things are picking up are the same old rubbish i’ve been hearing.
Lies.
When i see a real casualty, a complete outright bankruptcy, closure of a major institution, i’ll be convinced then, the U.S. means business.
Until then, it looks like friends, covering friends backs, with taxpayer money. Hardly the kind of confidence building necessary to instill trust in “things are turning around”.
Cut it out already!

Posted by gambino | Report as abusive

Where have you been in the past 8 years when we spent the lights out during the Republican run congress and the incompetent Bush administration

Posted by schroeder | Report as abusive

Did the thought ever occur to anyone that there might be no such thing as affordable health care, that the concept is an oxymoron, much like an affordable Rolls Royce. In the sixties, medical care was affordable – no CAT, PET, and MRI scans, chemotherapy for cancer was almost non-existant, fewer and relatively cheaper but less effective medications, no joint replacement surgery, less defensive medicine by doctors, etc. I would assume that new medical advances, and there always are new medical advances, would tend to make health even less affordable in the future.

Posted by Terrence A. Schulte | Report as abusive

The typical American homeowner is prepared to pay for the convenience of owning his domicile over 30 years. Why should not the taxpayer gaining a a better route to acceptible life, liberty and the pursuit of happiness from his government not be willing to amortize the initial “acquisition”cost of these benefits over 10 or even 20 years?

Posted by norman zelvin | Report as abusive

Dear Ms. Furchtgott-Roth,

I’m quite astonished that that a reputable news site such as Reuters would allow you to post a blog containing completely false information. Either you are incabable of reading a very simple table (and its written description) or you are spreading blatant lies to further your own agenda.

Table 1.1 on page 2 of the CBO’s report clearly shows a BUDGET SURPLUS for years 2012-2019!!! The NEGATIVE numbers for years 2008-2012 are BUDGET DEFICITS!!! A mildly intelligent child could interpret this table correctly. But if they couldn’t then all they would have to do is read the first two paragraphs where it is clearly explained. Despite you apparent lack of interpretive skills I assume you can at least read.

Below is the actual text from the CBO’s recent report: “The Budget and Economic Outlook: Fiscal Years 2009 to 2018″

The Congressional Budget Office (CBO) projects
that if current laws and policies remained unchanged, the
federal budget would show a deficit of $219 billion for
2008 (see Table 1-1). That deficit would amount to
1.5 percent of gross domestic product (GDP), slightly
larger than the shortfall of 1.2 percent of GDP ($163 billion) posted in 2007.

Beyond 2008, deficits under baseline projections continue
each year until 2012, when they yield to modest
surpluses through 2018. Under the assumptions that govern
those projections, the deficit falls from $219 billion
in 2008 (1.5 percent of GDP) to $198 billion in 2009
(1.3 percent of GDP) and $117 billion (0.7 percent of
GDP) in 2011 and then changes to small surpluses in
2012 and later years (see Figure 1-1). By 2018, the surplus reaches 1.0 percent of GDP.

I must say I am disgusted with Reuters for allowing this posting and astounded that a grown woman would allow her ideological biases against our president to so COMPLETELY cloud her judgement. You should both be ashamed.

If you don’t believe me, the link to the CBO report is below. Table 1.1 is on page 2 of the report itself, or page 20 of the PDF.

http://www.cbo.gov/ftpdocs/89xx/doc8917/ 01-23-2008_BudgetOutlook.pdf

Posted by Daniel | Report as abusive

Any child can read the above sentance where it says IF current laws and policies DON’T CHANGE the listed deficits and surpluses will occur. Obama is talking major changes.

Posted by john | Report as abusive

I think, some of us speak from our imagination.We intellectually fail to distinguish the reality and imagination. We must need to understand that the government is bankrupt, it is running two on going war, it has budget deficit, export deficit, decline to GDP, risk of deflation,toxic balance sheet, and so on. There are only few option left order to bring the economy in life. First, it requires print more dollars with a global risk. Second, it require create long lasting job with few chances.Third, it requires to tackle immediate homelessness. Fourth, it requires to prevent meltdown of financial institutes and so on. So, please, stop giving imaginary opinions.

The conclusion of Obama’s astrology chart, that is: the failure of his plan is unavoidable. It’s largely based on his unrealistic plan to the economy. He acts too emotional without a thoughful consideration of a balance plan.

By the year of 2010, there will be a lot of “weird” regulatory measures in the U.S. financial market, the worst year actually will be 2012, that will be the year the public finally understand we are absolutely broke and find out the bailout/stimulus plan. I advise Obama have to face the “reality” and do not try to sell himself like a celebrity in the media.

Facing the reality and act/react thoughfully are more important to Obama’s.

Posted by Dave | Report as abusive

“Let me assure readers that if only economists were elected to Congress, the deficit would shrink soon enough.”

You are joking, right? Economists? The very people whose primitive, 18th century theories have collapsed the global economy? The same people who can’t envision a healthy economy without the impossible concept of perpetual growth? The same people whose free trade theories, since the signing of GATT in 1947, have transformed the U.S. from the wealthiest nation on earth into a skid row bum?

Much better would be to elect accountants instead of economists, someone with the ability to do simple math and understand a balance sheet.

As usual, this is another critic with no answers. Just like the blind Republican party. Do nothing and no answers.

Posted by Steve | Report as abusive

Mr Obama is getting it all wrong. he promised his nation that he would focus on strenghtening the fundamentals of the economy, but now he will just amplify the current account deficits. he must push for more regulations and curbs on the mortgage and banking sector, and cut into america’s false capitalist pride. else, the persistiong relative poverty would just swell to a crescendo. as the days he spends in office increases, he will become more accountable for the crisis and it will cease to be an ‘inheritance’from bush.

Posted by Ryan Gerard Wilson | Report as abusive

I guess spending on bombs an bullets is cool but investing in our future is a no-no.

Where are all these laid off union workers, steel millers and Ford manufacturers going to go? Work at The Gap?

You folks are clueless and this nation is on a dead-end route.

Posted by RyanD. | Report as abusive

I agree with the author that deficit spending is not the solution to get out of this mess. The numbers don’t lie. Most of the states are having budget crises because they have to balance them out with revenues. The Federal government is able to avoid that because they have the ability to just print more money. The consequences of those actions are reflected in our current economy.

The Bush administration failed in its economic policies! Unfortunately, the Obama administration is following in the same steps on a more massive scale. This is no surprise since Bernanke is still on board and Geithner was already working with both Paulson and Bernanke as early as the first bailout of Bear Stearns. The same people in charge of the Federal Reserve and US Treasury made this recession worse by keeping rates artificially low in attempt to prop up the housing bubble.

@Daniel — the link you put in is to the old CBO reports (dated 1-20-08) that don’t reflect updated figures. The author is correct with her statements and supplied this up-to-date link (dated 3-20-09) that shows the deficits:

http://www.cbo.gov/ftpdocs/100xx/doc1001 4/03-20-PresidentBudget.pdf

“After “bottoming out” at $658 billion in 2012—a level more than 40 percent above the highest deficit under the presidency of George W. Bush— CBO projects the deficit to reach $1.2 trillion in 2019, or 6 percent of GDP. By 2019 government spending would take up nearly a quarter of GDP, far higher than at the peak of Iraq war spending, and the highest, except 2009 and 2010, since World War II.”

These assumptions do not include more fraud bailouts and wasteful stimulus packages that are sure to continue as the economy falls further.

On a side note, the CBO report on 1/23/08 estimated the unemployment rate for 2009 at 5.4%. Nationally, it is currently at 8% and in about 7 states it is already over 10%. This is significant in that it affects the projection of future revenues. The unemployment numbers are updated in the 3-20-09 report to 8.8%, but we are already at that number and it is only March 2009.

“March 27 (Bloomberg) — The number of U.S. states with a jobless rate exceeding 10 percent almost doubled in February as the worst employment slump in the postwar era spread.

Nevada, North Carolina and Oregon last month joined the four other states that had previously climbed above 10 percent, according to Labor Department data released today in Washington. Michigan, at 12 percent, remained the state with the highest unemployment rate, followed by South Carolina at 11 percent and Oregon at 10.8. California and Rhode Island bring the total number of states to seven.”

I love the way the Bush bashers blame him for big spending. Please explain how Bush created spending bills when the duty falls to the Congress. Also please explain how big spending bills occurred when Bush’s last three years in office where with a Democratic majority congress. It’s called ‘blame game for dummies’. Each side of voters blames the other, and the parties love it. Voters have let them get away with it for years. Let’s face it folks, both sides have dropped the ball on you, but you just won’t vote for independents, for fear you will ‘waste your vote’. I’ve got news for you: you’ve been wasting your votes for years.

Posted by Robert Bowers | Report as abusive

But you see, by investing four times our current deficit in Environmentalist Buzzwords and even more Benefits for the least productive people, more money will magically fall out of a great big hole in the sky solving all of our problems and giving us a Huge Surplus a decade or two after this Administration, along with whatever parts of the Industrial Infrastructure we still have, are long gone.

Keep Putting All Your Cards on “Hope”.

Posted by UsedToPostHere | Report as abusive

Daniel, I am from Illinois, the home state of President Obama. Every year for the past decade the state legislature has presented and passed into law a balanced budget. Before the fiscal year is halfway done the state is in the red ink to the tune of a billion or so dollars. Every year more debt is floated. It is clear the Illinois State Assembly revenue projections are as flawed as the character of the celebrated members of that institution.

I for one find the Congressional Budget Offices numbers just as suspect. Perhaps you would do well to look at the Office of Management and Budget, the General Accounting Office and independent revues as the Federal budget and revenue projections are public information. My father told me long ago “Figures don’t lie, but liars figure”.

Posted by Anubis | Report as abusive

I’ve been disappointed with all this spending and easy money for the institutions that failed us but it’s no surprise that it’s coming from another failed institution, the US government. Republicans say “Let’s fail!” while Obama’s plan is Smoke and Mirrors. He wants to make the US look not bankrupt (even though it really is) so the country can keep functioning “properly” and countries that actually saved their money, like China, can keep lending us more money. The basic issue is that the US spends tomorrow’s money today and it’s not just one or two people here it’s alot of American consumers, bankers, and government officials. The irresponsibility is at every level of society putting those who were responsible in jeopardy of losing all the things they worked for. Everyone can point fingers but big banks are getting rewarded for giving people who can’t afford homes financing which is simply encouraging the overspending culture we live in. Many people easily say what to do with toxic assets but many people are those assets. I think those who overspend should be severely punished as a warning to future generations about living beyond your means. In my opinion if we don’t see a great deflation in our economy then something is wrong because alot of the economy doesn’t really exist it’s just debt and speculation floating around. I thought that investing in infrastructure, schools, etc. would be like the New Deal in this potential coming depression but rather Obama is telling America “LET”S SPEND EVEN MORE!” and is unveiling government spending that makes Socialists impressed, Capitalists crying, and Laissez-faire people (the worst of all) in nirvana. The US needs to drop the falsehood that it is capitalist and believes in free trade. It never did. It has always been laissez-faire and supported the big, rich guy over the little one both domestically and internationally. Obama seems to me like twoface, one side he is supporting programs that we need but the other side is how badly burned we’ll get with all this spending. I fear that my country could not only suffer a cataclysmic depression but see it’s currency devaluate extremely and a chance for its government to go “officially bankrupt”. What’s even worse is that those who perpetrated the crisis are rewarded! This current system is rotten to the core! Maybe collapse can be a good thing…

Posted by Eldon Lopes | Report as abusive

I learned about astrology more than 10 years ago. I found cases where that what astrology books said was plain wrong. I would not take forecasts too seriously.

I am sure that if weird regulation comes, it will be forced by “friends backing friends” as parties exert a very strong pressure on policy implementation. If such weird regulations come, you bet Obama is not to blame.

If you wonder about regulation, there are plenty of countries that regulate. There is no need to reinvent the wheel.

Posted by Pablo | Report as abusive

Health care vouchers are an old republican idea that voters rejected when they voted for Obama. He also wasn’t voted in to cut spending on critical health care programs to save a buck. There are many countries with affordable public healthcare systems. But they do get taxed more. By they I mean everyone: businesses, consumers and the middle class. You get what you pay for.

Posted by Working Mother | Report as abusive

yes, lets cut the budget, the republican budget. I think more people without unemployment payments, not being able to get a government sponsored job, more people trying to figure out how to feed their family and put a roof over their head is exactly what the country needs right now. If FDR had only Stayed the Course with those same policies of Hoover, the country would have gotten better much quicker….or had a revolution simular to Germany….

Posted by Chris Thompson | Report as abusive