THE SECOND DEFICIT WAVE ON THE HORIZON


Information has costs. And those costs can be driven up by misrepresentations by leaders
and promoted by the media, the major responsibility of which may be the reduction of such
costs. We have over the past period witnessed an incredible abrogation of this duty by
leaders and the media. Not the least of these has been the promulgation of the assertion
by the Clinton administration that it has balanced the federal budget. That they had anything
at all to do with its supposed balancing is not the only problem, the larger concern being
that it  is not at all 'balanced,' and that any appearance that it may be is sheer misrepresentation
out of the the administration and the media. If the media chooses to cover a story, it becomes
news, but if they simply refuse to do so, it is irrelevant, unless they are forced to alter their
position. The media in large measure 'created' the Perot candidacy where they could have
ignored it. It spread the notion of budget cuts that were nonexistent. It ignored the Clinton
scandals and then did its best to contain their impact once the lid was off on them, although
it largely ignored the real security scandals involving China and related matters. But this sort
of misconduct by media is one of the factors in the diminished attention that is being given
to major broadcast media as their audience share numbers remain in freefall. It is also at the
root of Fox News decision to seek the audience being neglected by the other major network
biases. But even that does not help lower information costs. And such costs are crucial in
a republic which relies on an informed electorate, with the impact of such malfeasance being
an undermining of representative governance.

This consideration focuses on the balanced budget assertions referred to above, but it also
considers the problem of the deficit. Widespread and deciminated versions of that problem
are the result of misinformation that has helped drive up information costs. So, too, are
misrepresentations about the size of the deficit and the reasons behind that. The federal
budget is not balanced in the final year of the 20th century. It can only be made to appear
to be by concealing the federal operating deficit behind the social security budget surplus.
It has moved toward a balancing which may develop within the next few years with more
responsible taxation and spending by the 104th and 105th Congresses. There was a deficit
wave that grew out of the burgeoning of the federal bureaucracy from the middle sixties,
which began to be offset by the economic stimulus of the Reagan tax cut. But on the eve
of the new millenium, we face a recurrence of that deficit which may dwarf what we have
previously experienced, and that will evolve out of the runaway public sector with which
the country has been saddled. As the social security moves into virtual bankruptcy over
the next two decades, we may well face a second deficit wave, the impact of which would
be further stagnation of our economic condition. 

It is not merely that the ratio of those eligible to receive benefits compared to those working
and paying taxes to support the system is going to be far out of balance, but the make-up of
that supportive population that is the problem. In 1990, one out of five Americans was
'elderly,' but this ratio will have increased by the year 2025 to about one in three. At the
same time, however, the ratio of children in the population is going to drop from 1/3 to below
30 % during that time frame, suggesting further complications as time progresses. As the Baby
Boom population ripple retires, there will develop serious shortfalls in the revenue demands
of the system to pay them the social security benefits for which they have been taxes all through
their working lives. A system that is presently in surplus thanks to huge tax increases imposed
by raising the cap and the tax rate will quickly take a dive into the red. 

The current 'surplus' in the social security budget, being using to disguise the continuing deficit,
will not be 'there' to defray the expense because the government since the days of LBJ's
Great Society have been borrowing the money to finance runaway government spending.
It is true that the size of the deficit has been reduced on the combination of diminishing
defense spending and a tight-fisted Republican Congress, but the assertion that the budget
has been balanced by the Clinton Administration must be laid aside the reality that with no
supposed deficit in 1999-2000, the debt will actually increase!

The 'history of the deficit' is instructive to follow, but that along with the developing population
ratio support problem, suggests the real liklihood that a second such deficit wave is on the 
horizon not so far into the next century. With the requisites outlays expanding, how is the
government going to be able to keep up with the revenue needs of not only social security,
but also medicare and medicaid? 

Possible contributions to resolving the situation include
dramatic increases in the rate of tax for funding social security. Half of the tax is already
hidden because a matching amount is paid by employers, but a doubling of the approximate
12% social security tax we now have is not only plausible, but has been touted by the liberal
side of the aisle. They are also interested in removing the income cap and invoking means
testing on recipients. But such substantive tax increases would only serve to slow economic
growth and thus have a countervailing force operating which would diminish the potential
revenue flow from such tax hikes. Alternatives of rising productivity levels rest heavily on
investment, which would be also adversely affected. And the notion of increased immigration
or birth rates (which could include a diminishing of the policy of encouraging abortion), while
they might help, are matters of long term impact. The only other sources of revenue available
to funding the demands of the system would be cuts in the budget elsewhere, a deliberate
inflation of the money supply of massive calculation, or deficit spending. And given the impact
on the economy of the alternatives (other than population increases), the result would be to
further run up the deficit. 

The result will be that a budget approaching balance at the turn of the 
century is going to experience a new deficit wave not too far into the future of a scale that
will exceed those that resulted from the runaway spending of the Great Society which peaked
in the early 1980's until the economic stimulus of the Reagan tax cuts began to shrink it toward
the current evolving balance. And while additional tax cuts might help extend the two decades
of economic expansion that grew on Kemp-Roth, the 'miracle' that flowed from the reduction
of top marginal tax rates from 79 % to 39 % simply would not be of  the same magnitude,
although the enactment of a lower flat rate near 20 % would certainly be a boost, but  the
reduction of approximately 40 % on top incomes of 20 % could not match that resulting from
the 40 % tax cut of Reagan. And it would be largely offset by the tax hikes imposed by the
higher social security tax rate, means testing, and cap removal, coupled with inflation of the
money supply. At best, it might be a zero sum game.

Furthermore, the proposal floated by Clinton and his ilk of government diversion of social
security revenues into the stock market would have terrible consequences. The purchase
of stocks on the scale that would make possible would create federal ownership of vast 
amounts of what is now the private sector. Without commenting on the wisdom of such
socialist schemes, the one thing that is certain is that the impact on the operations of these
businesses would be catostrophic in terms of the profitability of the firms so controlled.
This would have a devastating impact on the economy. They would no longer be compelled
to operate as efficiently or even necessarily at even a normal profit.

Concern over a problem that is perhaps decades in the future is not the sort of thing that
political careers are often built upon. It is not the kind of matter that is likely to preoccupy
voters' minds, either, especially when information cost concerns complicate the situation.
The problem has not been ignored by media or  politicians, but it has often been played
in  ways that are counterproductive to its resolution. Instead of responsible economics,
we have been subjected to demogoguery that attacks tax policies favorable to the rich
and decries intelligent efforts to save our investment in social security as attempts to
kill old people and the like.

This consideration is not an effort at  prophecy. A severe economic dislocation could
bring the system into crisis much earlier. Likewise, an expanded economic base could
postpone the crisis indefinitely. And in many ways, the latter scenario would perhaps
seem more likely, for the present at least. The difficulty is that what is often passed as
the solution would only aggravate the situation and bring the crisis to fruitition sooner
by slowing the engines of economic development.

But with that developing storm over social security, we stand the prospect of a renewed
cycle of deficits, and perhaps not as far into the next century as Ronald Reagan's current
economic boom began in the past ( a point that the revision of history by those responsible
for driving up infornation costs have wrecklessly ignored). That second deficit wave would
push our nation into the tight waters of economic stagnation we faced saddled with the 
first deficit wave.

The Deficit Wave Cycles

1961 -- 1985		First Deficit Wave
1982 -- 2007		Declining Deficits
2005 -- 2030?		Second Deficit Wave

(see Saving Our Investment and The Origins of the Structural Deficit
in the Summer and  Fall 1997 issues of the eJPS).

See David Broder on this Second Deficit Wave from Washington
Post in October 2000Go Here

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