Right about now is a good time to start this discussion. The federal deficit for 2009 was just announced to have been $1.4 trillion, about 10% of GDP. We are on the road to approving a health care reform that will add at least between $25 and $50 billion annually to the deficit – I know its just been scored as deficit neutral, but this is really a smoke and mirrors analysis; and any big Afghanistan decision will add another $25 to $50 billion annually. As a start I want to talk about long run versus short run issues and why progressives ought to – but for the most part do not – see fiscal health as an issue they should take up.
We can expect several weeks of head shaking by the GOP at the current deficit numbers. We have already seen it begin. Passing their effrontery in bringing the issue up at all considering Bush 2’s record, they, deliberately, confuse the long and short run. In the short run, we should have a substantial deficit, and today’s deficit is not too large and does not pose current economic or financial risks. With unemployment close to 10%, the private sector is not creating enough demand to lower unemployment or to lead to sustained private sector growth. It is next to impossible to explain this particularly when the Republicans are arguing the opposite, but the Obama Administration is on the right course and will, I think, see the benefit in a much improved economy. This deficit would not matter if it went away over the next few years.
But the long run is a very different story. According to the Congressional Budget Office we have settled into a long-term, built-in 7% deficit which we will start seeing in about seven to 10 years, and from there the deficit starts rising rapidly. The consequences of deficits of this size are not going to be pretty: interest rates will be higher, growth will be lower, inflation will be higher, unemployment will be higher. All of this will happen slowly enough that there will always be a good reason for any administration or any congress to avoid the bad politics of actually doing anything. We will simply realize gradually that we are living in a world of, say, 4% inflation, 2% growth, and 6% to 7% unemployment. Paul Krugman has used the frog in the pot of water being slowly heated metaphor to describe our circumstances. I think this is apt as an explanation for where we are now, but since I do not think our political system is capable of anticipating problems and doing anything about them, I suspect that only an unpleasant crisis will cause us to move.
In my view, progressives ought to be in the front of anticipating and dealing with the emerging fiscal crisis. The kind of economy I framed above will hurt most of the people progressives care about, ultimately wreck the programs they have worked for, and turn American politics into a very mean direction – if it is possible to be any meaner. Ben Friedman’s wonderful book, “The Moral Consequences of Economic Growth,” should be at the top of every progressive’s reading list. But so far as I can see at this point, progressives are far away from being taken with this issue. There seems to me to be a tendency to deny the problem exists or a sense that some set of trick programs will make the problem go away; a similar denial that there might be consequences; and an overall stance that concern about fiscal health is a conservative position that good and right thinking folk don’t take.
I think we are headed toward big problems, and toward a cliff. I also think we will not do anything much about this. And I think it will take six or seven years to reach the edge of the crisis. So I will be following here fairly regularly the path to the financial and economic crisis of 2016.
Roosevelt Institute Braintruster Bo Cutter is a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.