Global Policy Forum

When Bush Administration officials discuss the deficit, they make it sound like a problem on the scale of a particularly persistent case of fiscal dandruff. "Manageable," Office of Management and Budget Director Joshua B. Bolten told a House hearing. "A concern," the chairman of the Council of Economic Advisers, N. Gregory Mankiw, wrote in The Post. Treasury Secretary John W. Snow ventured about as far out as any administration official, but he left the country to do it, telling a London audience that the new deficit numbers were "worrisome." And so, let's depart from our usual style on rendering numbers to consider exactly what "manageable" looks like. This year's deficit is projected to be $455 billion. That's $455,000,000,000. Over the next five years, the administration estimates, the cumulative deficits will total $1.9 trillion. That's $1,900,000,000,000.

Deficits such as these matter because the increased government borrowing creates a drag on the economy; it reduces the amount of capital available for private investment and consequently the increased national income that would result from greater investment. As Federal Reserve Board Chairman Alan Greenspan told the Senate Banking Committee last week, "There is no question that if you run substantial and excessive deficits over time, you are draining savings from the private sector, and other things equal, you do clearly undercut the growth rate of the economy." The problem occurs because -- as the administration, which tried for a while to argue this Economics 101 point, now concedes -- the greater competition for capital drives up interest rates. Mr. Mankiw summed this up nicely in his best-selling economics textbook: "When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate."

Deficits matter, as well, because the increased borrowing means the government has to spend even more on interest costs, which already account for a sizable chunk of government spending. That's made even worse by the deficit-driven increase in interest rates. This year, for example, the administration expects to pay $156 billion in interest -- three times what the federal government spends on education. By 2008 interest costs are projected to be $260 billion, more than half the total budget ($461 billion) for non-defense discretionary spending.

These particular deficits matter even more than general macroeconomic theory would suggest. It makes sense for the government to spend more than it takes in during periods of economic downturn. But the administration's tax cuts -- at least $1.7 trillion from 2001 through 2013 and more than $3 trillion if the administration gets its way and the supposedly temporary cuts are made permanent -- effectively lock in deficits for years to come, unless the tax cuts are repealed or draconian spending cuts, which would be politically unpalatable, are approved. Even the administration's own projections show a deficit of $226 billion in 2008. And while administration officials confidently talk about the economic growth that they expect the tax cuts to generate, their own analyses don't suggest the cuts pay for themselves. "Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run)," the 2003 Economic Report of the President said, "it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."

Moreover -- and most worrisome -- these structural deficits are being put in place at precisely the wrong time: when we ought to be socking money away (or at least paying down the existing debt) to pay for the soon-to-explode costs of Social Security and Medicare. The administration itself noted this as it issued the gloomy new projections. "Even if the budget were in balance today," it said, "the growth in the future costs of Social Security and Medicare beyond their dedicated resources would create deficits that grow ever larger as a share of the economy in the decades to come." This is not a far-off prospect: The baby boomers will start to reach retirement age in 2008, and the costs will climb steadily from there. Instead of saving for that rainy day, however, we're behaving like a couple approaching retirement age that maxes out credit cards to pay for a Caribbean cruise.

Much as the administration would have us believe otherwise, these deficits are a problem, and a serious one. To paraphrase Humphrey Bogart in "Casablanca": Maybe not today, maybe not tomorrow, but soon -- and for the rest of our lives.

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