Defining Deficits Down

Defining Deficits Down. By Isabel V. Sawhill
Brookings, January 29, 2010

January 29, 2010 — When the president submits his budget on February 1, there will be a lot of hand-wringing about the possible economic fallout from a virtually unprecedented accumulation of debt. A long string of deficits out into the future will increase our dependence on foreign lenders, threaten the recovery if borrowers begin to demand higher interest rates, burden taxpayers with the costs of servicing the debt, and leave our children with a less prosperous future. Although these economic consequences are bad enough, the effects on public confidence in their government are even worse. Paralysis in the face of such dire warnings tells the public that their government is not working, undermines trust in our political institutions, and leads to more cynicism about the entire process, with ramifications that go far beyond the fiscal problem itself. Moreover the problem is so dire now that instead of doubling down on our efforts to do something we have moved the goal posts and redefined our deficit reduction goals. Although this may simply reflect the depth of the hole we are in and the difficulty of digging our way out, it may also shift public perceptions toward too ready acceptance of current reality and its associated dangers.

In the past there were bipartisan efforts to deal with deficits that were far smaller than those currently projected. Such efforts were grounded in a common belief that spending beyond one’s means was imprudent, even morally wrong. The goal for most of the pre World War II years was simple: an annually balanced budget. This meant that spending was cut and taxes raised even when the economy was depressed as in the 1930s. Following World War II, economists began to argue that the goal should be amended to allow deficit spending during recessions as long as that was offset by surpluses during periods of full employment. By the 1980s, this slightly amended goal was still extant and enshrined, for example, in the Gramm-Rudman-Hollings bill that called for a balanced budget by 1991. And when Ross Perot campaigned in 1992 on the need for a balanced budget, and won 19 percent of the vote, Clinton responded by working hard throughout his two terms to get to balance. The decade ended with a surplus of $236 billion in the federal budget. Fast forward to this year, and the goal has shifted from balancing the budget to keeping deficits below 3 percent of GDP in the president’s budget. That would mean accepting a deficit of over $400 billion (in today’s dollars) as a goal. However, even this much more modest goal now appears impossible to reach.

The current administration will be criticized for moving the goal posts on deficit reduction and for doing far too little to restore fiscal balance. This year’s budget includes a freeze on non-security discretionary spending, support for pay-go rules, and a presidentially appointed deficit-reduction commission. These are good but totally insufficient steps. The spending freeze will affect only a tiny slice of the budget; the pay-go rules will make it more difficult for Congress to dig the hole deeper but won’t affect currently projected red ink; and the commission will likely be a paper tiger. In short, these proposals will still leave us with unsustainable deficits as far as the eye can see. Granted current deficits were largely inherited and have been further ballooned by the need to fight the current downturn, leaving the current administration with a herculean task. But it is depressing to discover that we can no long even aspire to balance the budget once the recession is over.

The late Senator Moynihan used to talk about defining deviancy down by which he meant that new norms get established in response to bad behavior. The nation’s fiscal behavior is now so bad that I fear we will soon accept a degree of fiscal profligacy that would have been unthinkable in earlier times. Shame on all of our elected officials, past and present, who have allowed this to happen.