THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
Scot Lehigh

Some truths about that deficit

By Scot Lehigh
January 29, 2010

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DEFICIT HAWKS of the world, rejoice! Long ignored, the federal budget deficit has finally arrived as an issue.

President Barack Obama just took a small step forward, announcing a limited federal spending freeze, to commence in 2011, plus a commission to recommend remedies.

The GOP, meanwhile, has suddenly remembered that a long time ago in a galaxy far, far away, it was actually the party of fiscal responsibility. Now, it’s a tad amusing to watch as some Rip Van Winkle Republicans, having slumbered through the borrow-and-spend binge of the Bush administration, wake up, rub the sleep from their eyes, spot the flood of red ink that began rising on their watch - and indignantly declare that something must be done. But hey, better late than never. So good morning, guys and gals, and welcome back to the world of sentient beings.

Still, a word of caution for you deficit fledglings. This issue is complicated. So let’s review some basics.

Truism 1: It’s the long-term deficits that are truly worrisome, not the big imbalances of this year or next.

With the recessionary implosion, we’ve suffered a large loss of economic activity. Thus, for the short-term, it makes sense for the government to keep deficit spending in order to stimulate more economic demand.

“When other people aren’t spending, then government has to play the role of spender of last resort,’’ says Isabel Sawhill, an economist at Brookings and a former associate director of the Office of Management and Budget. “The really serious problem is when you look out a decade or two from now, the deficits just keep getting worse.’’

Truism 2: Real deficit reduction will require both more revenue and less spending.

That equation is hard for both the right and the left to accept. Conservatives are loath to raise taxes, liberals reluctant to reduce spending. But any sober budget analyst will tell you that the problem is too massive to be solved by doing one without the other.

How massive? Well, in his State of the Union speech, Obama boasted about finding savings of $20 billion for next year. But once recovery comes, reducing the deficit to a manageable three percent of GDP by decade’s end would require spending cuts and revenue increases averaging $370 billion each year from 2013 to 2019, relative to the levels we’d have under current policy, says James Horney, director of federal fiscal policy for the Center on Budget and Policy Priorities, a progressive think tank.

Truism 3: Income tax cuts do not - repeat, do not - pay for themselves.

Certainly it would be marvelous if, by cutting income taxes, you could generate more revenue than you would have had at the higher level of taxation. But tenacious as that belief is with certain conservatives, it’s an accepted truth among economists of all ideological stripes that, at nonconfiscatory levels of taxation, income tax cuts simply do not pay for themselves.

“There is no credible conservative economist who would stand up for that proposition,’’ notes Robert Bixby, executive director of the Concord Coalition, a nonpartisan deficit watchdog.

That being the case, our next principle should be self-evident. Sadly, it’s not.

Truism 4: An income tax cut won’t contribute to deficit reduction. Rather, it will only make the situation worse. That’s why, though one-time tax rebates or temporary cuts are okay, we can’t afford permanent new tax cuts. Further, if a politician is pushing permanent income tax cuts as a deficit solution, he or she either isn’t grounded in economic reality or, worse, is peddling snake oil on purpose.

Truism 5: It won’t be enough just to tax the rich.

Taxing high earners is, of course, the favored Democratic solution. Obama, for example, has pledged not to raise taxes on families making less than $250,000. But candid budget experts concede that won’t do it, deficit-wise.

“In the long run, you are going to have to raise revenues above the level you would get under Obama’s policies,’’ says Horney.

That’s something no one wants to hear. And yet, if we’re ever going to curb the deficit, we need to confront the truth.

Scot Lehigh can be reached at lehigh@globe.com.

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