Record Federal Spending, Deficit Proposal Worries Some, Cheers Others

Published February 12, 2010

Congress might approve spending bills, but it’s the president’s budget that initially grabs headlines. Big headlines greeted President Obama’s fiscal 2011 budget proposal because everything about it is big—the spending, the deficit, the tax increases.

Spending: $3.8 trillion. Projected deficit: $1.6 trillion. Tax increases: $2 trillion over the next decade.

The administration’s budget proposal “is nothing more than a plan for more of the same—a very aggressive agenda of more government spending, more taxes, more deficits, and more debt—with just a few cosmetic budget maneuvers to give the illusion of restraint,” said Rep. Paul Ryan (R-WI), ranking Republican on the House Budget Committee. “Despite my hope that the President would alter his course, his budget will make an already unsustainable budget outlook much worse.”

Ryan’s Democrat counterpart, House Budget Committee Chairman John Spratt (D-SC), took a more sanguine view of the proposed budget.

Lower Deficits, But Deficits
“The President’s budget keeps an eye on the bottom line,” he argued in a statement. “The deficit is cut by half, from $1.556 trillion in 2010 (10.6 percent of GDP) to $727 billion (4.2 percent of GDP) in 2013. The budget continues to bring the deficit down, until it reaches 3.9 percent of GDP in 2014. The President also proposes a bipartisan fiscal commission to develop proposals to bring the deficit down further.

“At the same time, the President’s budget funds additional initiatives to spur job creation—such as tax credits for small businesses that hire new workers. And the emphasis is on Main Street rather than Wall Street,” Spratt added.

Obama’s proposed budget is more than double the 2001 federal budget of $1.86 trillion.

Credit Rating Warning
In the same week the president introduced his budget proposal, credit rating agency Moody’s warned the United States could see its AAA bond rating downgraded. A downgrade would indicate the U.S. government is a more risky borrower. This would make repaying the government debts more expensive, forcing the government to spend more of its revenue to finance the trillions of dollars it has borrowed.

The national debt (the sum of all debts owed by the federal government) first hit $1 trillion in the 1980s. Congress recently raised the national debt ceiling to $14 trillion. Obama’s budget projects another $9 trillion in debt over the next 10 years.

No Debt Reduction Plans
University of Maryland economist Carmen Reinhart said she worries no one in government has a serious plan to bring the national debt down after the economy recovers. Reinhart is a research associate for the National Bureau of Economic Research and coauthor with Kenneth Rogoff of “This Time Is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2009), an analysis of hundreds of years of fiscal foolishness by governments around the world.

For the immediate future, though, the budget deficit and national debt do not alarm Reinhart.

“Neither the deficits nor the debt have been surprising,” she said, “because it’s part of having a major financial crisis. The question is what is done going forward. In terms of where we are and what has transpired the last two years, my own view is that the sooner one has a plan in place to reduce the deficit burden the better. We don’t need to implement it today, but we should have a plan in place today.”

She said she does not believe the government should immediately tackle the debt because the economy is still too weak. However, with no serious plan to bring down debt, she fears high debt levels will linger and cause more economic harm.

High Debt, Lower Growth
Reinhart said there are few examples in history of countries successfully growing their way out of high levels of debt. The immediate post-World War II experience in the United States included declines in government spending that are not likely to be repeated.

Furthermore, she said, research shows “At gross debt levels above 90 percent of GDP, growth slows. Median growth falls 1 percent, and mean average growth rates fall a lot more.” National debt already tops $12 trillion, and the projected 2011 budget deficit would put it at more than $13.6 trillion, nearly 100 percent of GDP.

Others argue the government’s attempts to stimulate the economy are already doing economic harm by taking money out of the private sector and putting it into the government.

‘Not a Pretty Picture’
“It is not a pretty picture moving forward,” said economist Robert Ekelund, eminent scholar emeritus at Auburn University. He said a balanced budget amendment, even if passed, “would contain so many exceptions as to be ineffective. The best we could hope for is a marginal improvement or policies fostering economic growth without increasing deficits. Call me pessimistic because that’s what I am.”

Economist Mark Thornton of the Mises Institute might be even more pessimistic. Thornton began publishing articles warning of a housing bubble and coming economic crisis in 2004, nearly four years before the recession hit, and sees little improvement on the horizon.

“The budget and deficits are irresponsible and definitely threaten the economy,” he said. “They are unsustainable, and, combined with the future unfunded liabilities of the U.S. government, will reduce the standard of living of the current and subsequent generation.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.