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Good Politics Often Results In Bad Budgeting

It’s hard not to have real questions about how much of the current concern about this year’s deficit is real or just something that has been hyped for partisan political reasons. Over the past 50 years the deficit often has been just a surrogate for other issues and purposes, and much of what’s happening now seems to fit that characterization.

[IMGCAP(1)]But at this point the reasons that the deficit is an issue in its own right are irrelevant. Not only does it exist, one recent national survey showed that it’s close to terrorism as the top problem on people’s minds. That makes it impossible to ignore and complicates the efforts to deal with the economy in a way that hasn’t been the case for at least decades.

To a certain extent, this is a little surprising because deficits and downturns are anything but unusual in this country. There have been 45 budget deficits over the past 50 years, and more economic downturns than anyone wants to remember.

But in spite of all of this experience, there’s little agreement in 2010 on what to do and how to do it. In fact, if you read the economic headlines and opinion pages, it would be hard not to come to the conclusion that deficits and recessions are rare events with which the United States has had little practice. Just last week, for example, two of this country’s biggest economic icons — Paul Krugman and Alan Greenspan — had dueling and diametrically opposite pieces about what should be done now. Krugman demanded more economic stimulus; Greenspan said spending cuts were needed.

The budget and economy obviously have changed a great deal over the past half-century, and that means policies that might have been appropriate when Richard Nixon was president are not totally applicable to the current situation. Today’s federal budget, for example, is a mirror image of what it used to be, with about two-thirds of all spending now mandatory and ongoing rather than discretionary and annually approved. The demographics of the U.S. today and their effect on federal taxes and spending are overwhelmingly different now than in President Lyndon Johnson’s time.

The national debt is much higher in nominal terms, and federal income tax rates are far lower today than they were when the Beach Boys ruled the playlists on AM radio. And, state and local governments today have a far greater effect on the overall economy than ever before. This is particularly important now because the cutbacks that will start when the new fiscal year begins for 46 states on July 1 could equal or exceed the stimulus being provided by the federal government at the same time.

By now, larger-than-would-otherwise-be-tolerable federal deficits should be understandable and politically acceptable when economic downturns occur. Given what we’ve learned from past experience, a larger rather than a smaller response should have been the compelling thing to do. The Federal Reserve, which can act far more quickly than the legislative process when it chooses to do so, would have tamed the excesses.

But the ongoing debate shows this just isn’t the case. The short-term deficits that should be generally if not almost universally understood and acceptable, particularly in light of the very limited ability of further interest rate cuts to have much of a positive effect on economic growth, are neither.

The largest reason for this is also the biggest change that has occurred in U.S. budget and economic policymaking over the past 50 years. The budget deficit that in earlier times was considered to be mostly a byproduct of other policies now is a separate political issue. Today, the fact that there is a deficit is at least as important as is its potential value as a possible fiscal policy antidote to economic ills. This has added a level of political complexity to the current economic situation that hasn’t previously existed.

This situation seems unnatural given the recent history of deficit politics in the U.S. The federal deficit that up to now has been of concern to very few people because they haven’t been convinced that it actually was damaging to them personally is now seen by many as a problem worse than two things that are actually harmful — slow economic growth and high unemployment. The warnings about the deficit and national debt that up to now have gone largely unheard and unheeded suddenly are on a par with alarms about threats to homeland security.

It’s hard to see how this will change with an election only five months away. If the short-term deficit once again is a surrogate for other issues and efforts, proposals that make it better but also make the short-term economy worse are more likely to continue than to move in another direction.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”

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