The Deficit

A recent New York Times editorial is rather breathtaking in it's dismissal of the deficit and its alarm over the Republicans' proposed cuts.

In defense of their bill to slash federal spending by $61 billion over the next seven months, House Republicans claim they are trying to make the economy grow and create jobs. In truth, such deep and sudden cuts could derail the recovery, without ever addressing the real sources of budget deficits — mainly explosive health care costs and incessant high-end tax cuts.

First, $61 billion is a big number but it is dwarfed by the size of the deficit. It will take a much deeper cuts than that to trim the deficit to manageable size.

More important is their explanation that the deficit is nothing but high-end tax cuts and health care costs. "High-end tax cuts" is another way of saying "tax cuts for the rich" which in turn reflects the idea that everyone who makes less than $250,000 deserves a tax cut but those making more deserve higher taxes. This boils down to "soak the rich". So, is our failure to soak the rich the root of the deficit? Of course not. The deficit through 2007 was a fraction of the current deficit but the tax cuts were in place long before then.

After a 14-month fight over Obamacare which was supposed to tame health care costs, the Times is now admitting (indirectly) that it failed completely. Regardless, this is not the cause of the deficit, either.

The real cause is simple mathematics. Deficits happen when the government spends more than it takes in. Revenue is down because of the recession and it is not likely to recover in the near future. Unemployment and underemployment are still sky-high which translates to people not being taxed as much. At the same time, government spending jumped. It started with Bush's bailouts but those were on-time expenditures and some, like the TARP, were repaid. The Stimulus was sort of a one-time jump except for the way that government works. Once you increase someone's budget, even as part of a one-time bump, and reduction counts as a cut. Many agencies saw a permanent increase in their budget because of the one-time stimulus.

While the government can justify running a big deficit during a recession, that officially ended nearly two years ago. The government has to adjust to new fiscal realities - it's revenues have been reduced on a long-term basis. We have to adjust to this by cutting services. It may sound cruel but there is no alternative that does not lead to financial collapse.

The Times must know this but it is fighting a holding action for big government. If cutting $61 billion is spending would hurt the economy, so would raising taxes by that much. But they want to perpetuate the fiction that the solution to the deficit is nothing more than taxing the rich. That way government can continue to grow.

This is only the opening skirmish. The real fight will come when entitlement reform is finally discussed.