Deficit Spending, Trade Deficits Threaten Economic Health

According to this GAO report (GAO-05-325SP), our budgetary problem is not social security (or medicare) per se -- but current deficit spending. I'd love to see an analysis that suggests it's not as bad as it sounds ... but I doubt that there is one out there like that. Basically, with no change in spending levels (federal expenditures track GDP at current rates) and extending Bush's tax cuts -- in 2040 federal revenue will just (barely) pay interest on the deficit.

The near-term deficits are daunting—a $412 billion unified budget deficit in fiscal year 2004 (including a $567 billion on-budget deficit and a $155 billion off-budget surplus) and a $368 billion deficit (not including any supplemental appropriations) forecast for fiscal year 2005 by the Congressional Budget Office (CBO).

If these near-term deficits represented only a short-term phenomenon prompted by such factors as economic downturn or national security crises—there would be less cause for concern. However, deficits have grown notwithstanding the relatively strong rebound of the economy from the recession in 2001, and the incremental costs of responding to the nation's global war against terrorism and homeland security represent only a relatively small fraction of current and projected deficits.

Absent policy changes on the spending and/or revenue sides of the budget, a growing imbalance between expected federal spending and tax revenues will mean escalating and ultimately unsustainable federal deficits and debt that serve to threaten our future national security as well as the standard of living for the American people.

if discretionary spending grew only with inflation over the next 10 years and all existing tax cuts expire when scheduled under current law, spending for Social Security and health care programs would grow to consume over three-quarters of federal revenue by 2040. [see chart for full impact of words]

if discretionary spending grew at the same rate as the economy in the near term and if all tax cuts were extended, federal revenues may just be adequate to pay interest on the growing federal debt by 2040. [see chart for full impact of words]

Even Goldman Sachs (respectable, blue-blood, conservative investment bankers) was quoted today saying similar things about the trade deficit - so we have two boogey men:

Consumption and spending on residential buildings are a much larger share of the U.S. economy "than has historically been the case," the firm noted in a report to clients last month. Taken together, spending on consumer goods and housing has totaled nearly 76 percent of GDP in the past couple of years, compared with an average of about 69 percent of GDP over the past half-century. Given that the trade deficit is also at an all-time high, "these imbalances place the economy on a path that is ultimately unsustainable," the report said.