Wednesday, April 12, 2006

Ouch ... We're Even More in Debt!

The US budget deficit edged up in March, thanks in large part due to a 13.7% increase in spending compared to last March. Yes, the actual deficit increased by a lot less due to increased tax receipts, but that doesn't take away from the fact that we've got runaway spending. Talk about the collaboration of villians - a White House and its clones that just don't seem to care about deficits (in fact, Cheney loves to talk about how "Reagan proved deficits don't matter") and an opposition party that to whom the solution to deficits is not spending cuts but tax raises.

First the idea that Reagan somehow proved deficits don't matter. I'd love to see evidence that this was the case. The reality is that we have had a serious deficit crisis building for the last several decades, one that was temporarily ameliorated by the booming '90s (see the figure, taken from this page at K-State)

The red line's the Federal government's projects for the deficit. Keep in mind they are required to cut the budget in half within the next 5 years, so I'd take their projections with more than a grain of salt. The question is will tax receipts be able to reduce deficits? Given the multitude of asset bubbles we have at present, it appears unlikely that we will see even constant, let alone booming, receipts without a sharp increase in tax rates. We might, but it hardly is a given. Prudence then requires we focus on the spending side.

But of course, all this leads back to politicians. How many pols win elections talking about deficits as opposed to their favorite pet projects, be it war, protection of entitlement spending or what have you? And so we can continue to see growing deficits and more macroeconomic concern.

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