Kozlowski: A definite deficit problem

By Mark Kozlowski

What happens when the government carries a credit card balance that exceeds one-sixth the value… What happens when the government carries a credit card balance that exceeds one-sixth the value of all the goods and services produced every year in the entire world? Well, we’re in a position to find out. The U.S. national debt exceeds $14 trillion, which is roughly 100 percent of the U.S. annual GDP. The budget Congress is considering for the coming fiscal year has a deficit of between $1.1 and $1.6 trillion, which about equals the value of all goods and services produced in the U.S. in a month. That’s just the gap between how much the government spends and how much the government gets as revenue. This glum picture doesn’t even include the serious problems individual states have with their own budget shortfalls.

The size of the deficit is a serious problem. Lenders only have so much money, which they lend to the government, private enterprise, prodigal brothers-in-law and so forth. When the government issues a lot of debt, it creates a huge demand for funds provided by lenders. Lenders who give their money to the government are not lending it to private enterprise. Private businesses then have fewer people willing to lend to them and in order to attract any investment at all, lenders are forced to offer higher interest rates. This effect, known as “crowding out,” cuts into business profitability and makes it less attractive to start or expand businesses. In this way, a persistently large deficit will be a brake on the economy.

Another problem caused by the expanding national debt is that progressively more and more of the budget is required just to pay interest. With more money given to debt service, less money is available to pay for useful things like highways, aircraft carriers and the like. It also means less flexibility in terms of fiscal policy, as Japan is finding out. You can only roll out so many $800 billion stimulus packages before you find out that, oops, people won’t lend to you money anymore. This is what happened in Greece, and there’s no reason why it couldn’t happen here. Although risk of default is still remote for Illinois, it is interesting to note that Illinois bonds are rated the same as those of Portugal. This is a problem, as investors will demand a higher rate of interest on government debt to compensate for the fact that they aren’t so sure if they’ll get paid back at all. When this happens, it means that still more money is required to pay interest on the debt, further constraining our ability to do anything else.

So we have to do something. But what? Well, we have to either: a) cut spending, b) increase tax collection or c) both. Both solutions are difficult politically. If you attempt to slash spending by asking government workers to contribute more to their health insurance, as Wisconsin Gov. Scott Walker is doing, you end up with the opposing party in the state Senate skipping town, leaving you to deal with angry protesters inside the capitol rotunda. If, on a federal level, you try to touch the great white elephant of Social Security or other entitlement programs, you get angry old people who accuse you of forcing them to eat dog food. If you raise taxes, most everybody gets upset. All three of these solutions are, in effect if not in fact, exactly the same: you are taking money away from people who feel entitled to it. So it’s tempting to do nothing at all. But doing nothing means that eventually we simply won’t be able to pay for everything. At that point, we will simply have to raise taxes and cut spending, as Greece had to do. There will be no other choice.

These two fundamental realities, that we need to solve the problem of the deficit and that somebody is going to have to pay for that solution, have been lost on far too many people. For example, quite a few in Madison, Wis., have categorized Walker’s budget cuts as attempting to destroy American families by reducing benefits for public workers. Allow me to ask: Where does the money to pay for these benefits ultimately come from? It comes from other American families who have to pay income, sales, property, payroll, Medicare and other taxes. This is not to say that government employees shouldn’t have benefits or that people shouldn’t have to pay taxes. But we have to keep in mind that every dollar the government spends has to come from somebody.

What exactly needs to be done about the deficit? The recommendations of the Simpson-Bowles commission are a good place to start. The bipartisan debt committee came up with a number of solutions that were supported by, among others, Sen. Dick Durbin (D-Ill.) and Sen. Tom Coburn (R-Okla.) — hardly people in the habit of agreement. The panel’s recommendations have also been roundly commended by members of both parties, which certainly suggests compromise is possible. Maybe there are better solutions to the deficit problem, but one thing is clear — we can no longer pretend that there isn’t a problem.

Write [email protected]