HICKS: Reducing deficit imperative for national prosperity

December 26, 2009

The end of this decade is as good a time as any to reflect upon what has passed. We’ve had wars in Afghanistan, Iraq and the Horn of Africa—and, lest we forget, in New York, Pennsylvania and Virginia. We’ve had two recessions, three presidents, five Congresses and 10 Bowl Championship Series teams. Our population has risen, employment has risen, and personal income has risen. The average American family is healthier, wealthier and, ideally, wiser now than when the decade started.

However, to listen to political rhetoric today, you’d think we’ve been living in the darkest of ages. But as French author Gustave Flaubert told us, it is the “ignorance of history that causes us to slander our own times.” The facts reveal that, in terms of its length, unemployment, inflation and loss of production—the things that matter—the current recession ranks as only the third- or fourth-worst of the dozen post-World War II recessions. It hasn’t been as bad as the early 1980s, much less the Great Depression.

The end of a decade is also prime time for dwelling upon the next 10 years. A year ago, I’d have been optimistic. The buzz surrounding the new administration indicated they’d pursue a quick, but large, $220 billion stimulus bill (which I supported). Like many voters, I expected modest and rational changes to health care and environmental policy. I was mistaken.

The stimulus bill grew to almost $800 billion, which, together with the Troubled Asset Relief Program legislation, gave us the single largest one-year increase in national debt in history (by any measure). As this article goes to press, the effect of health care legislation is a mystery—not least to those who voted for it. Most estimates have it adding $1 trillion to the debt. Unlike earlier periods of high deficits, we aren’t buying anything permanent like infrastructure. This deficit is not sustainable; the spending will not help our economy grow and the legislation before Congress will only make the matter worse.

The real alarmists are wrong, though; the United States will not go bankrupt. We cannot—we own a mighty printing press. But, unless we begin to reduce our deficit, we face very difficult times. Without immediate reductions, probably no later than mid-2011, interest rates on U.S. securities (the debt the Chinese hold) will rise, and inflation will re-emerge.

Here again, the alarmists are wrong. We will not descend into spiraling double-digit inflation. The Federal Reserve will not let this happen. Officials will simply raise interest rates, too slowly at first, then vigorously. We will then enter another recession, for which we are most unready.

This doesn’t have to be, but reducing a deficit will take a once-a-century shift in politics. Tax increases, no matter how onerous or targeted, won’t be enough. Cuts to all discretionary spending won’t plug the budget hole. We will have to cut spending radically in defense, Medicaid and Medicare, aid to the poor, transportation and education. 2010 will be a pivotal year.•


Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.


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