Deficits start to matter politically

Irwin Stelzer:

$2,000,000,000,000. That's the amount by which the Obama administration raised its ten-year estimate of the nation's budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama's budget director, is "higher than desirable". He might have added that the administration's critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There's worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it know that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds "deeply alarming".

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the debt will be equal to 76 percent of the value of the nation's output of goods and services, almost double the 41 percent when Obama took control of the nation's finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others.

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The Tea Party Movement and the Health Care debate suggest that the deficit are a problem to millions of voters. It is were just Warren Buffett that had a problem, Obama and the Democrats could probably ignore him.

Robert Samuelson points out some of the same problems:

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In 1946, after World War II, the ratio of publicly held federal debt to GDP was 108.6 percent. Since then, the economy (our income) has generally grown faster than the debt. In 1974, the debt-to-GDP ratio reached a post-World War II low of 23.9 percent, and even in 2007, it was only 36.9 percent. That was manageable.

By contrast, today's prospective colossal borrowings dwarf likely economic growth. The Obama administration's latest projections, released last week, show nearly $11 trillion of borrowing from 2009 to 2019. In 2019, the debt-to-GDP ratio would be 76.5 percent. This could be too optimistic, because it assumes some spending restraint and tax increases. A projection by the Concord Coalition, a watchdog group, adds about $5 trillion in borrowing in that period. In 2019, the debt-to-GDP ratio could be roughly 100 percent.

Because such borrowings would be unprecedented in peacetime, they might go badly. It's easy to imagine problems. Some might become full-blown crises. It might be impossible to refinance maturing federal debt (average maturity: 51 months) except at much higher interest rates. The Federal Reserve might be pressured to inflate away the debt by buying boatloads of Treasury bonds; high inflation would be ruinous, as it was in the 1970s. The mere fear of uncontrolled deficits might trigger a flight away from the dollar on stock, bond and foreign exchange markets.

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I World War II we were financing most of that debt internally through the sale of war bonds and other instruments. It is difficult to imagine selling that debt to voters at this point and the number of foreign buyers is going to shrink as we flood the market, which means we will have to pay ever higher interest rates on the debt, unless we monetize it and inflate the currency to Venezuelan or even Zimbabwe levels.

Deficits are starting to matter.