Don’t be Fooled: Uncle Sam Is Still Bankrupt

The big spenders in Washington are all excited: the deficit is down. That must mean the budget crisis is over and Uncle Sam can go back to wasting money, big time.

Not that he ever stopped doing so. But now interest groups and leftish pundits are calling for more stimulus outlays, increased Medicaid, and expanded Social Security. They are defending huge increases in food stamp outlays. And 're theybewailing the terrible impact of “austerity,” defined as $5 trillion in deficits over the last four years.

The latest excitement has been caused by the recent Congressional Budget Office study detailing new budget projections. The federal budget deficit this year will be “only” $642 billion. 

That’s one-sixth of total federal outlays and 50 percent higher than that pre-Obama record deficit in 2008. But no matter; it’s not as big as before.

As I wrote in my new piece on American Spectator online:

In fact, the CBO’s latest report, “Updated Budget Projections:  Fiscal Years 2013 to 2023,” actually demonstrates that we face a continuing, enduring, and potentially catastrophic budget crisis. The near term is slightly less disastrous than originally thought. But without a genuine change of direction, the federal Leviathan remains headed over an economic cliff.

...However, this reduction does not reflect spending restraint. Rather, tax collections are up and the housing revival has at least temporarily stopped the fiscal bleeding of Washington’s boondoggle housing agencies. Explained the agency: the deficit estimate dropped significantly from February “mostly as a result of higher-than-expected revenues and an increase in payments to the Treasury by Fannie Mae and Freddie Mac.” 

While that's good news after a fashion—before trillion-dollar deficits no one would have been celebrating $642 in red ink!—the good news comes to an abrupt halt in 2015 when the deficit is expected to fall to $378. Then deficits will start moving back up. In 2023, estimated CBO, Washington will run $895 billion in red ink. For the coming decade that means $6.3 trillion more in accumulated deficits. 

More borrowing means more interest payments, which further fuel spending. Moreover, warned CBO, “because federal borrowing reduces national saving, over time the capital stock would be smaller and total wages would be lower than they would be if the debt was reduced.” The growth-inhibiting impact of higher debt is detailed by a number of studies, from, for instance, economists Carmen Reinhard, Vincent Reinhard, and Kenneth Rogoff, the Bank for International Settlements, and the International Monetary Fund.

Of course, after being made poorer, Americans still would have to find the necessary resources to pay the increased interest payments and accumulated debt. 

Worse, the next decade is not the critical period. In the years beyond, the retirement of the baby boomers will push up Social Security and Medicare outlays, while rising health insurance premiums under Obamacare will create political pressure for increased federal subsidies. The long-term fiscal forecast remains truly depressing.

Over the last four decades federal spending has run 20.2 percent of GDP. Absent significant policy changes, that ratio could hit 36 percent within a quarter century. Over time, Social Security and Medicare alone could consume almost as much of the U.S. economy as the entire government did over the last four decades.

Other than that, everything is fine with the federal budget!

Be happy that the deficit this year won’t be quite as bad as originally predicted.  But don’t be fooled.  The budget crisis is not over.  Rather, it has only just begun.