Is Anyone Serious About the Deficit?
Washington, DC -- We've been hearing the Republicans talk about very little else for the past few days. The president is certain to discuss it at length in the State of the Union. We just heard the report of the bi-partisan Commission on the Deficit. Potential government bankruptcy is a dominant theme of the punditocracy here in DC. Serious economists -- of all stripes -- see it as an enormously threatening long-term problem.
But the public doesn't put the deficit at the top of its priority list. And perhaps for that reason, it is difficult to avoid the conclusion that almost no one spending time and energy debating the deficit as a policy actually cares much about the addressing it -- after all, neither party has ever lost the White House because of the federal debt.
But it's worse. Our leaders, because they are not serious about the problem but merely want to exploit it for other purposes, are consistently and knowingly misleading themselves and the public about the source, and hence the solution, to the problem.
There are two competing -- and utterly wrong -- narratives about why the United States has a long-term, serious, structural fiscal deficit.
The Republicans and the Tea Party have a contrary narrative. The deficit is the result of "out of control" government spending on what I will call "general welfare" services after the section of the Constitution that envisaged them, saying that one purpose of the national government was to provide for the "general welfare." These are government expenditures that provide for public goods and community services -- the National Institutes of Health research budget, the National Park Service, the clean-air and clean-water programs of the EPA, Amtrak, the federal highways, the Department of Education, the Army Corps of Engineers, the Agriculture Department's extension services, and federal grants for public housing. These are all areas that the new Republican congressional leadership wants to target to reduce federal spending by $100 billion next year. The anti-government elevator pitch is "stop the bloated bureaucracy."
But watch as the Republican leadership claims that "everything is on the table." A short list of things that I guarantee you won't be on their table: the most recent generation of bloated farm subsidies, the enormous tax giveaways to oil and coal, the loan guarantees to the nuclear industry, the pork-barrel projects of the Corps of Engineers, and the vast profits earned off the Defense budget by private contractors like Blackwater. None of these sacred-cow expenses make us safer or more resilient in the long run. And none of them will be part of Mitch McConnell's or Eric Cantor's deficit-fighting strategy.
But, fundamentally, most of this is small change.
The reality is that the current deficit is the result of neither a demographic tsunami hitting the country nor out-of-control expenditures for public goods and community services. The demographic problem is real -- but it hasn't really hit yet. And the routine expenses for government services are smaller as a part of either the federal budget or the national economy than they were the last time we were poised to retire the federal debt -- at the end of the Clinton administration. (Indeed, since 1970, "discretionary spending" has been down as a percentage of GDP by a full 25 percent.)
So where does the current deficit come from? It comes from three sources:
First, since the Clinton years, Congress and the White House have created three new, major, on-going quasi or full entitlement programs: The ethanol mandate, an increased investment in farm subsidies, and the Bush Medicare drug benefit, among them, are responsible for $10 billion or 10 percent of this year's federal operating deficit. These are -- effectively -- entitlements. But they are not the result of some demographic tidal wave overwhelming New Deal retirement and Great Frontier health programs. Congress chose, for political reasons, to mortgage future tax revenues to purposes other than running the general welfare functions of government or paying down the deficit.
Second, faced with the risk of a fully fiscally solvent federal government that could afford new general-welfare spending, thereby making America more like Europe, the reactionary right and the Bush administration passed enormous tax cuts that were strategically designed to create a deficit crisis -- not just the tax cuts for the top 1 percent, around which Obama and the Republicans have been battling, but the entire array of Bush tax cuts.
Third, and perhaps most important and least noted, America chose to self-insure against supposed unlikely "Black Swan" events. A black swan is an apparently unanticipated event, but one whose magnitude creates a huge opportunity or crisis. And most of this year's federal deficit ($1.4 trillion) is largely the result of four true, or quasi, Black Swans:
- The enormous U.S. trade deficit and the escalating prices for natural resources, particularly oil. (Perhaps $1 trillion a year.)
- The wars in Afghanistan and Iraq. ($3-5 trillion.)
- The collapse of the U.S. housing mortgage market. (Still counting, but at least $200 billion for Fannie Mae and Freddie Mac alone.)
- The banking crisis and the resulting global Great Recession. ($500 billion a year as the result of the loss of 10 million jobs.) Almost two-thirds of this year's deficit is the result of the recession alone.
I say "true or quasi-" Black Swans because it seems to me that, in fact, all four of these budget catastrophes should not have been unanticipated. We knew enough to hedge against them, or even to prevent them. Take the price of oil, which played a significant role in the Great Recession and is once again threatening our recovery. The American auto industry had to be bailed out in large part because auto companies refused to consider or plan for the possibility of gasoline at $4 or $5 a gallon. But really, how surprising was this? Shouldn't reasonably prudent planning have taken such an event into account? (And we know that a serious national investment in reducing our reliance on oil would have prevented these price spikes by damping global demand.) We should have anticipated this event. But Detroit -- and Washington -- never seriously considered a hedge against an oil-price spike.
After repeatedly being sucked into the politics of Western Asia by our addiction to foreign oil, how much of a Black Swan were Iraq and Afghanistan really to the Pentagon? Not much I'll bet. The generals weren't surprised -- but the Budget Committees and the Treasury allegedly were.
And weren't there lots of warning signs that there might be a housing and banking bubble building between 2005 and 2008?
My own view is that leaders and policy makers knew that these Black Swans were possible -- just as homeowners know that a fire might burn down their house. But unlike prudent homeowners, our leaders chose to self-insure -- to simply say, "Well if oil hits $5/gallon, if the mortgage market collapses, if we have a several-trillion-dollar set of wars in Central and West Asia, then we'll deal with that when it happens."
(Of course, in politics, with its short-term time horizons, self-insurance is always overly attractive -- because if a politician refuses to pay the premiums, it is likely that his or her successors, perhaps even future generations, will be the ones who pay the price.)
This problem exists across scales. I've cited some economy-wide Black Swans. But take the budget of the U.S. Forest Service. It consistently under-invests in fire-prevention -- and as a result is hit with enormous bills for firefighting. As a nation, we spend too little on education for youth populations at risk -- and too much on prisons. Our penchant to bust our budgets by scrimping on prevention, resilience, and insurance is a deep and understandable dilemma in democratic government.
So I'm going to argue that the deepest source of the federal fiscal crisis -- which I think is real -- is our short-sighted refusal to invest in making our society more resilient and less vulnerable to Black Swans. We need to invest more, not less in insurance. But it is public services that, when well-designed, create resilience. Federal research in alternatives to oil, more adequately funded and empowered bank and mortgage regulatory authorities, and a serious industrial policy designed to improve our long-term trade deficit in energy and unhook us from foreign oil, these all must be public functions. The private market won't ever fund insurance for our society as a whole -- it lacks the incentives.
But the idea that prevention -- getting ready for the big, expensive, budget-busting events like war, global oil crises, and economic collapses -- is the key to balancing the long-term federal budget, is almost entirely absent from debate.
Preventing budget busting disasters is the key to fiscal security. And no one is talking about it. But our leaders do know about it.
Which is why, I would argue, the current debate is not about the deficit at all. Our leadership doesn't want to change its behavior -- because it's much easier to self-insure at the expense of tomorrow. The debate is focused on who will reap the benefits of the insurance premiums our leaders won't tell us owe. Fixing the deficit would be easy -- if we were having a real discussion about how to do it.
We're not. And we're not demanding one.
