Some Unpleasant Budget Arithmetic
11/24/03 7:53am EST

The US budget is out of control. The sharp shift from surplus to deficit in recent years is by far the biggest setback in 50 years--and it isn't over. Most observers expect tax cuts and higher outlays for defense and related items to push the fiscal-2004 deficit up into the $500-billion vicinity. Any thoughts of relief thereafter are a pipe dream until political priorities adjust. Some simple arithmetic shows that continued deficits of this size are the best we can hope for in coming years. Thus, our projection of a $5.5-trillion ten-year deficit is at risk of another upward revision.

It is troubling that this has not set off alarm bells in Washington, where the two-point mantra is that the deficit is no larger relative to GDP than at prior cyclical extremes and has no serious impact on interest rates and the economy. The first point, while true, fails to recognize that the prospects for cyclical improvement are quite poor. As for the second point, it defies common sense and lots of careful research to think that the highest-rated credit on the planet can borrow half a trillion dollars a year without pushing aside some private investment and ultimately hurting productivity growth.

Excerpt via Goldman Sachs

( ed. Say it with me: warm and fuzzy. )