by Tula Connell, Apr 23, 2007

U.S. Federal Budget Deficit

Balancing the federal budget is not a sexy subject matter. In fact, just the words “federal budget” put off most people because the issues involved are so complex and so, well, dull. But a recent gathering of economists at the nonprofit Economic Policy Institute (EPI) tried to make sense for the rest of us what a balanced budget really means—while agreeing that the nation’s current budget deficit cannot be addressed without a solution to America’s failed health care system.
 
As part of EPI’s fourth Agenda for Shared Prosperity forum last week, Nobel Laureate economist Joseph Stiglitz gave the keynote address on “Getting Beyond Balanced Budget Mania and Addressing the Nation’s Needs.” Stiglitz was followed by a panel discussion that included Brookings Institute economist Henry Aaron, who spoke on chronic deficits; Children’s Project Director Joan Lombardi, who discussed investing in early childhood development; and EPI economist Max Sawicky, who spoke on why public investment matters. Launched in January, the Agenda for Shared Prosperity is a network of economists and policy makers who will propose and promote ideas to advance a comprehensive and workable economic program to address the nation’s problems.
 
Stiglitz, a professor at Columbia University and former chief economist at the World Bank, noted that budget debates are a useful way to focus on what a country’s priorities are—and said the nation’s current worries about the $8.8 trillion budget deficit are understandable, “given the absolute mismanagement of the deficit over the past six years.” 

The magnitude of the fiscal deficit depends on how you structure your tax policy. So the Bush administration should be blamed for having a very badly designed tax policy that minimized the stimulus per dollar of deficit. It took a lot of work to get a policy that was so badly designed. But they did it. There are lots of other tax policies that could have had equal stimulus with a lot smaller deficit.

In short, Bush’s budget deficit is bad because, in part, it involves a tax policy that does not address the nation’s growing income inequality and does not stimulate the economy. One factor behind the nation’s fiscal deficit is the U.S. trade deficit, now at $58.9 billion, with China recently overtaking the United States in exports. Said Stiglitz:

When the trade deficit goes up, the fiscal deficit responds because the government wants to maintain full employment.

Further, Bush dragged the nation’s budget into a massive deficit without addressing key national priorities, foremost of which is health care. (Take a look at the AFL-CIO analysis of Bush’s fiscal year 2008 budget, which once again preserves expensive tax cuts for the wealthy and boosts military spending dramatically, while cutting crucial programs for the most vulnerable Americans: children, the elderly, the poor and the sick.)

Aaron, who soon will issue a paper through EPI on “Chronic Deficits: Entitlement Crisis or Health Care Reform Crisis?” sought to redefine the problem of the projected long-term budget deficit from an entitlements crisis to a health care crisis. The solution, Aaron maintained, is not to cut Medicare and Social Security, but to reform our nation’s health care system.

There is a long-term fiscal problem, and every smidgeon of it is health care. Secondly, there is no budget-related entitlement crisis, other than health care. Third, we have to pay attention to private health care spending along with the problem of rising public outlays. There is no practical way to deal with rising per-capita public health care spending unless we reform the health care system as a whole. And that means the health care system that affects us all.

Returning the federal budget to include public investments in such fundamental priorities as health care, Social Security, early childhood development and access to higher education should not be hard, said Sawicky.