2009 January 07 Wednesday
Record US $1.2 Trillion Deficit Could Hit $1.7T

One way to look at a huge American budget deficit: The US government is testing the willingness of China to fund America's budget deficit in order to maintain America's trade deficit.

The Congressional Budget Office predicted on Wednesday that the federal deficit would balloon to $1.2 trillion this year — even before Democrats pass an economic stimulus bill that could cost an additional $1 trillion spread over this year and next.

To a degree that would have been unimaginable two years ago, economists and politicians from across the political spectrum have put aside calls for fiscal restraint and decided that Congress should spend whatever it takes to rescue the economy.

Remember when home buyers and lenders put aside restraint and bid up homes and commercial buildings to ridiculous price levels? A new mania in the government has replaced the mania in the real estate market. Of course, the mania in the real estate market replaced the dot com mania. What I want to know: which mania will replace the government spending mania? Tulips anyone?

Ronald Reagan's previous post-WWII record deficit is getting beaten by a large margin.

The budget office said the $1.2 trillion deficit would equal 8.3 percent of gross domestic product, obliterating the previous postwar record of 6 percent, reached in 1983 under President Ronald Reagan.

If Democrats enact a stimulus program of $1 trillion over two years, which is possible, the deficit this year could widen to about $1.7 trillion or more than 10 percent of gross domestic product.

Think about that. More than 10% of GDP.

Obama is starting out as a big spender. But you can bet the US Department of Defense budget will take a big hit.

And that stimulus package could still face a difficult time in Congress if fiscal conservatives can successfully define its author as just a traditional big-spending Democrat in new clothes.

“In order to make these investments that we need, we will have to cut the spending that we don’t,” Obama said at a Jan. 7 news conference.

What else will Obama cut?

Changes in Social Security and Medicare? Are changes to reduce the rate of growth of old age entitlements politically possible?

WASHINGTON — Changes in Social Security and Medicare will be central to efforts to bring federal spending in line, President-elect Barack Obama said on Wednesday, as the Congressional Budget Office projected a $1.2 trillion budget deficit for the fiscal year.

Obama is a leftward leaning Democrat. So you wouldn't expect him to cut old age entitlements. On the other hand, Richard Nixon went to communist Russia and China while Bill Clinton signed the Republican welfare reform.

One way to cut old age entitlements is to gradually raise the ages of eligibility. These age rises do not cut montly payments or medical options. So they aren't as easily labeled as cuts. Another way to do it is to restrict what medical providers can get paid. This again avoids the cuts label because in theory you can still get whatever treatment that now gets paid less to get done. How far such cuts can go without reducing availability is one of the things we are going to learn in coming years. Price controls are probably going to play a big role in slowing the rise in medical spending.

Share |      By Randall Parker at 2009 January 07 08:46 PM  Economics Government Costs

Stephen said at January 8, 2009 2:13 AM:

The US deficit shouldn't be too hard to fix given appropriate will power - here's some ideas:

* Cut military spending to, say, $200 billion (still more than triple the next closest) saving $400 billion per year.

* For other government agencies, impose an immediate 5% cut in expenditure across the board.
* Cut another 10% off the remaining agencies that have grown too rapidly over the last eight years.
* Each financial year thereafter require all agencies to cut their budget by 1%.
* Actually increase taxes.
* Once the credit card has been paid off, shred it, then:
* Cut taxes by 1% every year until they get back to a comfortable level.

oh, require upfront funding of all future entitlements.

Ned said at January 8, 2009 7:55 AM:

In 1990 the US government spent $1.253 trillion. That amount, adjusted for inflation and population increase, equaled $2.367 trillion in 2007. But, in fact, the amount spent was $2.784 trillion. If the budget had been kept at $2.367 trillion, there would have been a surplus, not a deficit. Is it not possible that we could live with the amount of government we had in 1990?

Randall Parker said at January 8, 2009 8:52 PM:


Will power: There's the rub. The will power is far greater on the part of those who want stuff from the government.

averros said at January 9, 2009 1:50 AM:

> Obama is starting out as a big spender. But you can bet the US Department of Defense budget will take a big hit.

Wishful thinking. This sacred cow will chew and spit out Obama; in fact, DoD is getting more and more involved in the domestic life in US. See http://freedominourtime.blogspot.com

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