5 September 2009 Two Deficit Questions for Linda Bilmes (revised)
In an interview with Doug Gavel on Harvard’s Kennedy School of Government website, Public Policy Lecturer Linda Bilmes — one of the leading US experts in budgeting — offers her take on the federal deficit.
From the article:
“…the deficit over the next decade is $2 trillion higher than the administration first projected. This is because long-term spending – on things like Medicare, Social Security, the Iraq and Afghanistan wars and paying interest on the debt – is still out of control. Tax revenues will go up as the economy recovers but our spending is rising at an even faster rate. There are only two ways to pay off the debt: to raise taxes or cut spending – neither of which we want to do until the recession is over.”
My humble take on the situation is that raising taxes is likely to facilitate reduced consumer spending; and that a problematic consequence of reduced consumer spending could be a decrease in our demand for Chinese imports, which absolutely must be maintained, as our demand for their products is the primary (the only?) reason China lends us money. In short, we borrow from China to buy goods Made in China. Any reduction in consumer spending, whether spurned by a tax increase or not, that causes a drop in our demand for Chinese products decreases China’s incentive to lend to us except at higher interest rates. Higher interest loan repayments only further constrain long-term fiscal discipline.
That’s my take, and if it holds water, my question is: How do we reduce consumer spending without risking higher interest rates?
“The question is whether we as a nation have the political will to take steps that will reduce long-term government expenditures, such as making changes to entitlements and cutting spending on wasteful military programs. That is why it is so important to make progress on health care reform.”
What will happen if we don’t find the political will to reduce long-term government expenditures?
“Unfortunately the debt problem will further exacerbate the problems in this country in terms of how we prioritize our spending. It is unlikely that we will make significant changes to the big entitlement or military spending programs. It is unlikely that we will reduce earmarks for pet projects or seriously crack down on tax fraud, war profiteering, or inflated bank bonuses. But the huge interest payments on the debt will cut into the total budget pie. So Congress will probably limit discretionary funding for programs like research into rare diseases, pure scientific research, funding for national parks and wildlife, aid to states and cities, mental health clinics, and investment in training federal workers – simply because these are the easiest things to cut.”