All those zeros
A Times EditorialThe numbers behind the federal deficit are beyond comprehension to many Americans, but they carry a more immediate risk than we may realize.
Published February 2, 2005
It is difficult to worry about a number that seems detached from reality. That could explain why some Americans see the ever-escalating projections for the federal deficit and yawn. Just the other day, the estimate of this year's deficit grew to $368-billion and then to $427-billion, based on predictions first from Congress and then the White House.
In fact, those numbers are nearly meaningless because they are admittedly based on inaccurate assumptions, so the real deficit could be much larger. Congress' budget office didn't figure in the cost of the Iraq war, so add another $80-billion. Neither Congress nor the White House included the costs of additional tax cuts or privatizing Social Security, so add another $4-trillion or so to the deficit. It is difficult for most of us to comprehend a number with this many zeros: 0 0 0 0 0 0 0 0 0 0 0 0.
Yet there is good reason for everyone to start paying attention to the zeros. An uncontrolled deficit carries tangible risks for every American. It threatens to leave our children and grandchildren with a burdensome IOU that could diminish their standard of living. Coupled with the current record trade imbalance, a growing deficit also weakens the value of the dollar. It threatens to drive interest rates up and job creation down.
Generational responsibility, buying power, affordable credit and sustainable employment - those are concepts Americans do understand, and each is related to the deficit.
Peter G. Peterson, secretary of commerce under President Nixon, warns in his book Running on Empty of the looming crisis unless we reduce our national debt and make Social Security and Medicare sustainable. "One of the almost criminal things we did, we took all our kids' surpluses and we spent them . . . on programs that had nothing to do with Social Security," he said. Unfortunately, the retirement fix being discussed by President Bush is based on borrowed money that would pile even more debt on the next generation.
Actually, some of the pain could be felt much sooner. Increased government borrowing should have already driven up interest rates, leaving Americans with less disposable income. It hasn't yet, because foreign governments - particularly China and Japan - have been eager to lend us billions of dollars cheaply so that we can go on buying their imported goods (and saving less).
So far, we have paid a small price for our wasteful ways, but that could be changing. The practice has left the United States with a record trade deficit and a devalued dollar, particularly against the euro and Japanese yen. While a weak dollar should help us sell more of our own products abroad, it also reflects a declining foreign appetite for investment opportunities in America.
If China and other countries decide to seek a better return elsewhere, it will become more expensive for the government to finance the deficit - which would ultimately affect all borrowing. The inevitable result would be higher interest rates for every American and less money to spend. That could do real harm to the economy and weaken already anemic job growth.
The rest of the world recognizes the problem. The United Nations reported recently that "the seemingly intractable nature of the United States' twin (budget and trade) deficits suggests . . . there is a risk the dollar could decline further," which could have an ugly ripple effect on the world economy, and therefore our own.
Still not convinced? None other than Federal Reserve Chairman Alan Greenspan and the Federal Open Market Committee he heads - and which regulates the money supply - expressed concern about "the magnitude of current and projected fiscal deficits" in minutes of its last meeting.
One particular warning stands out. Easy credit has allowed Americans to speculate in real estate, a situation that some committee members see as evidence of "excessive risk-taking in financial markets." In the past, Greenspan has addressed such risks with interest rate hikes. If the real estate bubble were to deflate, many Americans would find they are not nearly as wealthy as they thought. In short, as a nation and a people we need to start spending less and saving more.
So the next time Bush and Congress dismiss the threat of bigger deficits as they promote some new tax cut or spending plan, listen closely. They are talking about your financial future.