The National Debt and Deficit Ain't Such a Big Deal After All

Whaddya mean there's no deficit to worry about?

A lot of steam has been building behind the idea that our national debt and annual deficit isn't all it's cracked up to be, and that's liable to be rather unsettling to Republicans who routinely cry wolf about our crushing deficits, which have been brought on by Barack Obama's spending spree. (Of course, there was no Obama spending spree, but that's not the point.)

So let's take a look at the issues involved and break down where the sides stand.

First, it's important to note that Republicans have never really given a damn about deficits -- remember Dick Cheney's famous "Deficits don't matter" remark? Republicans have only cared about what could be targeted by deficit fever, and that's entitlement cuts. You see, the holy grail for conservatives has always been the shredding of the safety net dating from FDR's New Deal and LBJ's Great Society. The lever has always been "Deficits will kill us! They're eating us alive!"

Only it turns out they're not, and that's really making it tough for the congressional Republicans to maintain their all-out assault on entitlements. Here's Paul Krugman putting it in a nutshell:

To say what should be obvious: Republicans don’t care about the deficit. They care about exploiting the deficit to pursue their goal of dismantling the social insurance system. They want a fiscal crisis; they need it; they’re enjoying it. I mean, how is “starve the beast” supposed to work? Precisely by creating a fiscal crisis, giving you an excuse to slash Social Security and Medicare.

The idea that they’re going to cheerfully accept a deal that will take the current deficit off the table as a scare story without doing major damage to the key social insurance programs, and then have a philosophical discussion about how we might change those programs over the longer term, is pure fantasy. That would amount to an admission of defeat on their part.

Now, maybe we will get that admission of defeat. But that’s what it will be — not a Grand Bargain between the parties, acting together in the nation’s interest.

If I read Krugman correctly, he's saying that solving the deficit problem without trashing entitlement programs would be more than a hollow victory for Republicans. It would be a catastrophe because it was never the deficits that mattered, it was the opportunity "deficit panic" offered to smashing welfare programs for the poor and elderly.

Whaddya mean Obama's wised up to our tricks?

That's why, in my view, Mitch McConnell kept saying "President Obama refuses to do what he should, which is to lead on these issues. This is a monumental failure of leadership." No, Mitch, it's not.

McConnell just wants Obama to put forward a plan -- as part of the nonsensical Grand Bargain -- that would cut Social Security and Medicaid so that Republicans can then vote against the plan because Obama also insisted on raising revenue. No new taxes!

Then, the deficit is once again not tackled, but Obama and the Democrats are politically on the hook for entitlement cuts, which the Republicans are drooling over in anticipation of using it against the Democrats in 2014. Worked in 2010 but won't work this time -- we hope -- because, so far, Obama looks to have gotten wise to the game.

By standing up to the Republicans -- and, frankly, negotiating from his newly found strength stemming from the election victory -- has yielded a cave on the fiscal cliff and just this week another cave on the debt ceiling. Sure, they've kicked the can down the road, pretending that they can force an entitlement showdown with the sequester, due to hit March 1st, the continuing resolution funding federal agencies, which expires March 27th, the federal budget, due by April 15th, as well as the next showdown date on the debt ceiling in May.

But what chance is there that the President is going to cave then when he hasn't so far? As for the 2014 budget, Obama is required to issue one by February 2nd but says he will be late because of delays caused by the fiscal cliff fight. He may put it off until the Senate produces its own, which is due April 15th. Of course, the expiration of the continuing resolution offers the Republicans a chance to shut down the government, but it's unclear whether Republicans have the stomach for it (see Gingrich, 1995-1996).

If the Republicans can't gin up a new crisis after letting all of the above slip through their fingers, they will be without a fiscal crisis after having shot their wad without dinging entitlements. What ever will they do?

More Krugman today:

But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit.

Second, both deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which, therefore, led both to low tax receipts and to a rise in unemployment benefits and other government expenses. It should have been obvious that the deficit would come down as the economy recovered. But this point was hard to get across until deficit reduction started appearing in the data.

Now it has — and reasonable forecasts, like those of Jan Hatzius of Goldman Sachs, suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015.

Not so scary indeed. If you take the above link to Jan Hatzius's outlook, you'll find he has some surprisingly upbeat predictions for 2013 and 2014.

Whaddya mean my no-tax pledge is not relevant anymore?

If there's no reason for fiscal panic, whatever are the Republicans to do? Gin up another fiscal crisis out of thin air? Oh, they'll try, but will they succeed? Do they have the grit to play catastrophe politics over and over? Will they instead realize that graduating from the Party of No to the Party of Doom is not a way out of the wilderness for the Party as a Whole. They have been pretty crazy, though, and we can't count on the recent smackdown in the 2012 election to knock some permanent sense into their heads.

There even more good news (for Americans, not Republicans) in this report by David Kamin as reported in WaPo's Wonkblog by Dylan Matthews:

But we may not even need that additional deficit reduction. Kamin estimates that health-care spending growth will cause a significant increase in revenue from the Obamacare excise tax on expensive health-insurance plans. What’s more, rising incomes will naturally increase income tax revenue by pushing more people into higher bracket, and the aging of the population means money will start to come out of tax-preferred IRAs and 401(k)s and suddenly become taxable. These factors alone reduce the long-run deficit by 2.8 percent. Combine that with a permanent Social Security fix — or, if you’d prefer, a policy of tying discretionary spending growth to the rate of inflation and population growth — and you barely have any long-run deficit problem to speak of[.]

Read the whole report to see some pretty convincing graphs.

As I'm recently retired, it should have occurred to me that there was a huge tax revenue increase slated to swell as the boomers retire, but, well, it didn't. I don't relish paying all those delayed taxes, but if it helps to end the deficit-hawks nonsense, it'll be well worth it.

Sez here in the Post my taxes go up when I retire and tap into my IRAs. Who knew? (Hint: your accountant.)