Good News, Bad News

There was good news and bad news in Washington today. The Congressional Budget Office predicted that over the next ten years annual budget deficits will shrink by $3.3 trillion. The bad news is that, despite the savings, the annual budget deficits are predicted to total roughly $3.5 trillion over the next decade. The debt now stands at $14.6 trillion. Even if the deficit shrinks according to CBO predictions, it is expected that the debt will increase by $8.5 trillion over those same ten years. Deficits aren't really a problem. Borrowing money is painless. It is paying off debt that hurts.

Many in Washington, particularly those in the White House, are no doubt pleased by the news. It is proof that they are effectively addressing the situation. Their steps to reduce the deficit are working, or at least are predicted to work (you never know if you will need another bail out or stimulus package). Of course, the news is only good news if you ignore the larger situation and simply consider less of a deficit a good thing. It is predicted, I would say it is certain, that massive federal spending will continue unabated. Cuts will be made and savings will be found but they will in no way be sufficient to stop the financial bleeding. The debt will continue to go up. As the debt goes up the costs of carrying that debt will go up. Interest on the debt cost the U.S. $202 billion last year. Even in Washington that is a lot of money.

If the CBO predictions are borne out we are still looking at yearly deficits of nearly $350 billion over the next decade. That is not good news. The debt is the real problem, not deficits. Deficits can be easily, if painfully, taken care of. The government is perfectly capable of passing a balanced budget. They are simply unwilling to. The reason they are unwilling to is that it would amount to collective political suicide. That is why the debt will continue to go up.

There is a third way to address deficits apart from raising taxes or cutting spending. That is to hold government spending flat and wait for the economy to catch up. That option is nearly as bad to elected officials as the first two. While not quite as bad as cutting spending or raising taxes, it would mean saying no to interest groups and voters.

The debt is an economic issue, but it above all else a political issue. It is the politics of spending that drive the problem. Politicians like to spend. Arguably, they need to spend if they want to be reelected. They are compelled to support spending desired by their constituents. It is the very nature of their job. They are also driven by ego. They want libraries with their name on it. The want the gratitude of their constituents. They want the grandeur of being responsible bridges, harbors, and highways. They want history to know who they were and what they have done. The rely on the largess of government to achieve those ends. Getting Johnny a recommendation to West Point or a smoothing over a constituents social security problem is no longer enough. Projects are needed. Money must be distributed.

Any solution to the debt crisis will involve members of Congress telling their constituents how much more they will have to pay, what they cannot have, and worse, what they will lose. That is the real problem behind addressing the debt. The vanity and ego of politicians only contributes to it.

So, the good news out of Washington is that deficits are likely to decrease. The bad news is that they are not going to disappear. Even if the economy rebounds, unless there is a dramatic increase in revenue or a historical cut in spending, the debt is going to continue going up: just more slowly than anticipated. I suppose less of a bad thing can be a good thing if you look at it just the right way.