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Why Deficits Matter.

Aired on PBS News Hour

Warner: NOW EVERYBODY TALKS ABOUT BUDGET DEFICITS BUT DO THEY REALLY MATTER? OUR ECONOMICS CORRESPONDENT PAUL SOLOMON OF WGBH-BOSTON LOOKS AT THAT.

 THANK YOU.

Reporter: THE NEW BUDGET IS OUT, AND SOMEWHERE IN THOSE PHONEBOOK-THICK VOLUMES IS A NUMBER THAT’S STRUCK A CHORD. THE COUNTRY IS RUNNING MORE THAN HALF A TRILLION DOLLARS A YEAR IN THE RED, AND SHORTLY AFTER THE ANNOUNCEMENT, FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN INCLUDED DEFICIT CONCERNS IN A SOBERING REPORT TO CONGRESS.

            BUDGET PROJECTIONS FROM THE CONGRESSIONAL BUDGET OFFICE AND THE OFFICE OF MANAGEMENT AND BUDGET INDICATES THAT VERY SIZABLE DEFICITS ARE IN PROSPECT IN THE YEARS TO COME. BUT FEDERAL BUDGET DEFICITS COULD CAUSE DIFFICULTIES EVEN IN THE RELATIVELY NEAR TERM.

Reporter: DEMOCRATS, MEANWHILE, HAVE BEEN QUICK TO SEIZE THE MOMENT. THIS MEANS THAT THE COUNTRY UNDER PRESIDENT BUSH’S BUDGET IS SPENDING $900,000 A MINUTE MORE THAN WERE TAKING IN-$900,000 A MINUTE.

Reporter: A GROUP FORMED TO OPPOSE PRESIDENT BUSH, MOVEON.ORG, HAS MADE A TV AD BLAMING THE PRESIDENT FOR DEFICITS THAT WILL SUPPOSEDLY SADDLE THE NEXT GENERATION WITH DEPILATING DEBTS. THAT’S A TRILLION DOLLARS IF YOU COUNT BOTH THIS YEAR AND LAST; MORE IF YOU PROJECT AHEAD. BUT NO MATTER HOW YOU SLICE IT IT’S MONEY THAT HAS TO BE BORROWED AND PAID BACK. THAT HAS AGAIN BROUGHT THE DEFICIT PROBLEM TO THE FORE-A PROBLEM WE’RE GOING TO TRY TO EXPLAIN.

            WHILE CRITICS BLAME TAX CUTS FOR THE DEFICIT, THE ADMINISTRATION SAYS IT’S DUE TO LOWER GOVERNMENT REVENUES, AND IRAQ, AND PROMISES THAT FUTURE DEFICITS WILL BE LOWER.

            TODAY’S DEFICIT IS CERTAINLY UNDERSTANDABLE, BUT THAT DEFICIT IS ALSO UNDERSTANDABLE AND UNWELCOME. AND WITH CONGRESS’S HELP, WE WILL BRING IT DOWN. (APPLAUSE)

            Reporter: OR AS THE PRESIDENT PUT IT IN HIS RECENT STATE OF THE UNION SPEECH: WE CAN CUT THE DEFICIT IN HALF OVER THE NEXT FIVE YEARS (APPLAUSE)

            Reporter: SHORT-TERM, THE ADMINISTRATION AND MANY ECONOMISTS ARGUE, THE ECONOMY WAS IN RECESSION, SO IT NEEDED A BOOST. BORROWING MONEY TO ENGAGE IN DEFICIT SPENDING, THEY SAY-FOR THE MILITARY, FOR THE PRESIDENT’S TAX CUTS-HAS GOTTEN AMERICA OFF THE GROUND. NOW THAT THE ECONOMY’S MOVING AGAIN, DEFECTS SHOULD COME DOWN. BUT BEFORE ASKING IF THEY REALLY WILL, WHY DO BOTH THE ADMINISTRATION AND ITS CRITICS SAY DEFICIT REDUCTION IS SUCH A BIG DEAL? WELL IN THE LONG RUN, SAYS ECONOMIST BEN FRIEDMAN, HURTS ECONOMIC GROWTH IS HURT BY GOVERNMENT BORROWING, WHICH IS COMPETING FOR MONEY AGAINST THE PRIVATE SECTOR.

            IT’S COMPETING AGAINST THE GENERAL MOTORS AND THE GENERAL ELECTRICS OF THE WORLD THAT MIGHT LIKE TO BORROW MONEY TO PUT UP A NEW FACTORY OR TO MODERNIZE AN OLD FACTORY. IT’S BORROWING AGAINST ANYBODY WHO’S RUNNING A SMALL BUSINESS OR A PLUMBING SHOP THAT WOULD LIKE TO MODERNIZE AND EXPAND. AND GUESS WHO WINS WHEN THE TREASURY COMPETES WITH EITHER PEOPLE LIKE YOU OR ME OR EVEN PEOPLE LIKE GENERAL MOTORS? THE TREASURY ALWAYS WINS.

Reporter: THE TREASURY WINS BECAUSE IT CAN PAY A HIGHER INTEREST RATE, AND THUS DIVERT MONEY FROM PRIVATE SO-CALLED CAPITAL INVESTMENTS FOR FUTURE GROWTH.

THE PRESIDENT’S ECONOMIC ADVISOR, GREG MANKIW: I THINK MAINSTREAM ECONOMICS PROFESSION SAYS THAT YES, BUDGET DEFICITS DO HAVE AN ADVERSE IMPACT ON ECONOMIC GROWTH, BECAUSE BUDGETS DEFICITS TEND TO CROWD OUT PRIVATE CAPITOL ACCUMULATION. AND THAT’S ONE OF THE REASONS WHY A BUDGET DEFICIT IS A CONCERN AND WHY THE PRESIDENT WANTS TO … WANTS TO GET THE BUDGET DEFICIT DOWN.

Reporter: NOW THERE’S SKEPTICISM ABOUT SUCH REDUCTION, EVEN AMONG REPUBLICANS IN THE CONGRESS. THE PRESIDENT WANTS TO MAKE HIS TAX CUTS PERM ANT, AND HIS NUMBERS ASSUME HOLDING GOVERNMENT SPENDING FAR BELOW IT’S HISTORICAL GROWTH RATE. WYOMING SENATOR MICHEL ENZI THINKS THAT WOULD BE UNCHARACTERISTIC OF CONGRESS.

WERE NOT VERY GOOD AT CUTTING ANYTHING. WERE NOT EVEN…NOT EVEN GOOD AT SLIGHTLY REDUCING THINGS. WHAT WE GO INTO PARTICULARLY IN AN ELECTION YEAR IS WE GO INTO A PHASE OF TRYING TO OUTBID EACH OTHER ON EVERY PROGRAM THAT COMES ALONG.

Reporter: BUT LET’S ASSUME, FOR THE MOMENT, THAT THE PRESIDENT AND CONGRESS DO MANAGE TO SOMEHOW CUT THE DEFICIT IN HALF. DEFICIT HAWKS WARN THAT THERE’S STILL A PROBLEM IN THE WINGS. AND HERE IT IS. THE ONE OBVIOUS SOURCE OF MONEY TO INVEST IN AMERICA’S FUTURE IS THE AMERICAN INDIVIDUALS AND COMPANIES SAVE. BUT AMERICANS NOW SAVE FAR LESS THAN WE USED TO. BACK IN THE 1980s, OF EVERY DOLLAR AMERICANS AND U.S. FIRMS EARNED WE SAVED ABOUT EIGHT CENTS’. THAT SAVINGS WAS MONEY TO INVEST-IN NEW COMPANIES, FOR EXAMPLE. TODAY, THOUGH, WE SAVE LESS THAN FIVE CENTS ON THE DOLLAR. BUT AT THE SAME TIME, DEFICITS ARE NOW UP ALMOST TO FIVE CENTS ON THE DOLLAR. UNCLE SAM IS BORROWING EXACTLY AS MUCH AS WE SAVE. AND EVEN IF THE DEFICIT, AND THUS THE BORROWING, WERE CUT IN HALF, HE’D STILL BE SOAKING UP THE EQUIVALENT OF HALF OUR PRIVATE NATIONAL SAVINGS-MONEY THAT, SAYS BEN FRIEDMAN, WOULD OTHERWISE BE INVESTED TO GROW THE ECONOMY.

THIS IS ABOUT UNDERMINING THE ECONOMY'S ABILITY TO DO THE KIND OF INVESTING THAT WE NEED, THAT THE ECONOMY NEEDS IN ORDER TO BECOME MORE PRODUCTIVE OVER TIME. THIS IS ABOUT HOW MUCH CAN WE DO IN THE WAY OF MODERNIZING OUR FACTORIES? HOW MUCH CAN WE DO IN THE WAY OF PROVIDING HIGH-QUALITY AND THEREFORE HIGH-PAYING JOBS FOR MORE PEOPLE? AND I THINK CUMULATING OVER TIME, IT MAKES A DIFFERENCE FOR THE KIND OF ECONOMY AND THEREFORE FOR THE OF SOCIETY THAT WE HAVE.

Reporter: OKAY, SO IF UNCLE SAM BORROWED ALL OF U.S. SAVINGS, WE’D BE IN TROUBLE. BUT THERE’S ANOTHER SOURCE OF SAVINGS: FOREIGNERS LIKE THE JAPANESE, WHO’VE BEEN INVESTING THEIR SAVINGS IN US FOR DECADES-BUYING U.S. STOCKS, REAL ESTATE, LENDING TO UNCLE SAM. JUST LAST YEAR THE JAPANESE LOANED US ABOUT 40% OF THE MONEY UNCLE SAM BORROWED- ROUGHLY TWO OF THOSE FIVE CENTS YOU SAW EARLIER BUT THERE’S A CATCH.. FOREIGNERS CAN EASILY LEND ELSEWHERE. AND THERE’S NOW TALK THAT JAPAN AND CHINA MAY CUT BACK ON THEIR INVESTING IN AND LENDING TO THE U.S. SO, BOTTOM LINE: U.S. SAVING IS DOWN, U.S. GOVERNMENT BORROWING IS RISING, AND FOREIGNERS COULD STOP MAKING UP THE DIFFERENCE. ALL OF WHICH SETS THE STAGE FOR WHAT MAY BE THE BIGGEST REASON DEFICITS MATTER: THE BABY BOOM HAVING BEEN AN ECONOMIC FORCE SINCE IT BECAME OF AGE, IT’S NOW REACHING RETIREMENT. BOOMERS, AFTER PAYING SOCIAL SECURITY AND MEDICARE TAXES FOR DECADES, WILL FINALLY START COLLECTING WHEN THEY HANG UP THEIR ROCK ‘N’ ROLL SHOES. OR, AS ALAN GREENSPAN PUT IT TO CONGRESS:

MY REAL CONCERN IS THAT WHEN THE TIME COMES TO START TO PAY THESE BENEFITS, WE’RE GOING TO FIND THAT WE ARE IN VERY SERIOUS FISCAL DIFFICULTY.

Reporter: GREG MANKIW SAYS THE ADMINISTRATION ALSO CONCERNED, BUT THAT THE FIX WILL COME FROM A COMBINATION OF ECONOMIC GROWTH, SPENDING RESTRAINTS, AND THE REFORM OF SOCIAL SECURITY.

I HOPE WHAT HAPPENS IS WE GET A NATIONAL CONSENSUS AROUND RETHINKING SOCIAL SECURITY, THAT PEOPLE LOOK HARD AT THE PRESIDENT’S PROPOSAL FOR PERSONAL ACCOUNTS, LOOK HARD AT THE SOCIAL SECURITY COMMISSION’S REPORT, AND TOWARD A POLITICAL CONSENSUS THAT WE NEED TO MOVE TOWARDS A SYSTEM THAT IS SUITABLE FOR FUTURE GENERATIONS.

Reporter: IN THE END, THOUGH ALMOST EVERY ANALYSIS ASSUMES THAT “SUSTAINABLE” MUST MEAN, AT LEAST IN PART, “LOWER TOTAL BENEFITS” REFORMS MAY BE PERFECTLY REASONABLE IF WE’RE LIVING LONGER AND RETIRING LATER, WHY SHOULDN’T OUR BENEFITS BE DELAYED? BUT WILL THE BABY BOOM STAND FOR THAT? RECALL THE IMAGE OF DAN ROSTENKOWSKI BACK IN 1989, WHEN DEMOCRAT CHAIRMAN OF THE WAYS AND MEANS COMMITTEE SEEMED TO SUPPORT ENTITLEMENT CUTBACK FOR THE ELDERLY. AS THE BABY BOOM REACHES SUCH MATURITY, IT’S POWER AT THE POLLS MAY MAKE CAR-RATTLING UNNECESSARY. BUT UNTRIMMED BOOMER BENEFITS WILL HAVE TO COME FROM THOSE STILL WORKING THAT IMPLIES A RICHER ECONOMY, WHICH CAN AFFORD MORE TAXES AND BORROWING. BUT THE ROAD TO A RICHER ECONOMY TOMORROW IS MORE INVESTMENT TODAY. AND THAT’S WHAT BIG DEFICITS AND A GROWING DEBT THREATENS.

BUT NO ONE IS WILLING TO MAKE THE SACRIFICES.

Reporter: BACK IN 1986, THE GRACE COMMISSION, APPOINTED BY PRESIDENT REAGAN TO IMPROVE AMERICAN COMPETITIVENESS, ALSO MADE A TV AD. IT IMAGINED AMERICA IF DEFICITS JUST KEPT GROWING, JUST KEPT ADDING UP TO A BIGGER AND BIGGER CUMULATIVE DEBT.

$2 TRILLION. DIDN’T THAT FRIGHTEN YOU?

Reporter: TODAY, THE DEBT IS ACTUALLY CLOSER TO $4 TRILLION, AND MORE THAN $7 TRILLION IF YOU ADD THE GOVERNMENTS I.O.U.s HELD BY TRUST FUNDS LIKE SOCIAL SECURITY AND MEDICARE.

I HAVE A QUESTION.

Reporter: THE QUESTION IS, WILL CONTINUED BORROWING STARVE   THE U.S. ECONOMY OF THE MONEY IT NEEDS TO BUILD FOR THE FUTURE? AND BY 2017, PRESUMABLY, WE’LL FIND OUT.

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