We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the US government to borrow too much money.
The Congressional Budget Office (CBO) last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion, roughly triple what it was in 2008. We should hope we are that lucky. The deficit will be that low only if Uncle Sam dies and goes to heaven.
Make no mistake, the CBO forecast is the lowest of lowball estimates. It excludes President-elect Barack Obama’s proposed stimulus package and understates the likely costs of the Iraq war, among other things. A comprehensive estimate that accounts for all “known knowns,” as Donald Rumsfeld might say, would be higher by about half a trillion dollars. If the stimulus bill passes, the deficit next year will be $1.7 trillion.A trillion is a strange and difficult number to contemplate, but thinking through the economic implications of that massive deficit requires doing so. The number itself is one million millions. A government that started with a balanced budget could run a $1.7 trillion deficit by mailing 1.7 million households $1 million, or 17 million households $100,000.
Or try this. The whole world’s military spending in 2006 totaled a little less than $1.2 trillion. So next year’s US deficit could cover that and still have $500 billion left over for building bridges.
Perhaps the most disturbing comparison is this one: When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.
How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 per cent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 per cent higher. Of course, all that happened mostly on a Republican watch.
One reason the increase is so dramatic is the mystery of compounding. Each year, Congress passed pork-laden expenditure bills, which became part of the long-run baseline the minute they became law. Each time that the federal government wasted a billion dollars, it created budget space to waste $1 billion again and again, ad infinitum.
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That’s perhaps the scariest fact about next year’s budget. The skyrocketing spending of 2009 will be the CBO baseline for every year after that. It will be easy to provide health care to everyone; the budget space will be blocked out. Indeed, Congress can spend with impunity in years to come, covered by the protective shroud of the CBO baseline that this year delivers.
(Kevin Hassett is a Bloomberg News columnist. The opinions expressed are his own)