The Budget is Going to be Okay

Paul Krugman of the New York Times writes:

I get a lot of worried mail along the lines of “how on earth will we ever be able to pay off our debt”? Look, there are real worries — but the math per se isn’t very hard.

The Obama administration’s budget (pdf) predicts that by 2020 we’ll have net federal debt of around 70% of GDP and a budget deficit of around 4 percent of GDP. Now, you don’t have to go to a zero budget deficit to make headway on the debt — a budget deficit of 2-3 percent of GDP would imply a steadily declining debt/GDP ratio. So if you believe the administration’s budget estimates, we’ll need to find another 1-2 percent of GDP in revenue or cost savings.

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That’s not, in economic terms, a huge number. We could raise taxes that much and still be one of the lowest-tax nations in the advanced world. Or we could save a significant share of that total by not being totally prepared for the day when Soviet tanks sweep across the North German plain.

The only reason to doubt our ability to get things under control a decade from now is politics: if we’re still deadlocked, if sane Republicans are cowed by the Tea Party, then sure, we can have a fiscal crisis. And longer term, we’ll be in a mess unless we get health care costs under control — which is exactly what we’re trying to do, in the face of cries about death panels.

Politics complicates the budgeting process because so many people simply don't know how much the country spends on its many priorities. People often over-estimate how much is spent on foreign aid and domestic programs (education, transportation, housing, etc), while they underestimate how much is spent on entitlement programs (Social Security, Medicaid, Medicare, etc). Numbers are changed around the margins, but roughly speaking, how much as a percentage we spend on each item has largely remained the same.

Getting the public to understand the budget is also complicated by lying politicians. One of my biggest pet-peeves is politicians who misrepresent our spending priorities to sell the story that hundreds of billions of dollars are spent every year on waste, fraud, and abuse. We hear stories from ignorant pols who rail against "millions" spent on frivolous things like a middle-of-nowhere museum in Montana or a study on bear mating patterns. (Never mind that $2 million spent on a scientific study breaks down to less than a penny per person.)

Here is Obama's $3.7 trillion proposed FY 2011 budget:

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And here is the breakdown for the $481 billion in discretionary domestic spending:

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If this budget proposal were enacted unchanged, it would increase the overall deficit by $1.2 trillion--that's how much the Administration predicts we'll be short in FY2011. Due to the inevitable economic recovery, the Administration is predicting that the annual budget deficit will level-off in the $700-800 billion range over the next few years. As Krugman says, it's okay to not have a balanced budget. Due to increasing GDP, we can make headway on the debt by simply keeping the deficit low.

A balanced budget is doable, however. All it would take is some modest tax increases and modest budget cuts. It's widely known that the area of the budget that receives the least amount of scrutiny is the Defense budget. Obama insisted on a partial spending freeze, meaning that domestic discretionary spending will not increase from FY10 to FY11. The least the government can do is apply the same standard to the bloated Defense budget.

The biggest budgetary scare is the ballooning costs of health services. That's why you might hear of doomsday stories about the debt being out-of-control within ten years. To me, the biggest selling point of the Affordable Care Act was the CBO reporting that it would lessen the burden on the budget of government-provided health care (Medicare and Medicaid).

So policies are now in place to try to skyrocketing medical costs down. Any problems that arise from Social Security can be dealt with by utilizing modest tax increases or small cuts in benefits. The annual budget deficit is very manageable. Once it's taken care of, we can start paying down the national debt and stop throwing away $250 billion every year.

All in all, as long as the adults remain in charge, things are going to be okay!

The Budget is Going to be Okay