Remember, in high school, when we felt like we had the world on a string? This was true of all things. Even economics class. Especially economics class.
In my junior year, 1999, unemployment was falling, GDP was growing, and there was a budget surplus. We thought we had it all figured out.
Those were the days, weren't they? Four years later, we find ourselves with a $427 billion budget deficit.
I wanted to write about this for the column. There was just one problem.
Times were so good in high school that, on the day we talked about budget deficits, I was not paying close attention. (I was probably thinking about how Doug Flutie was going to lead the Bills to victory or trying to get "Pretty Fly For A White Guy" out of my head).
There is no shame in this. Most students, I bet, do not know quite what the deficit is. I also bet that this "knowledge deficit" is why politicians get away with racking up the real deficits so easily.
To fill this gap in my education - and maybe in yours too - I placed a call to my old high school economics teacher, Mr. John Grandits.
Ben: Hello, Mr. Grandits. It's Ben Cady. I have a column for The Spectrum, and I was hoping you could help explain the budget deficit to our readers.
Mr. G: Sure. Cady ... Ben Cady ... Oh, yeah. I remember you. Tall, skinny guy? Blond? No luck with girls?
Ben: You must be thinking of someone else.
Mr. G: No, I'm pretty sure ...
Ben: Let's get on with the questions. The government has a $430 billion debt this year. Who exactly do they owe?
Mr. G: Foreign investors. mostly. They see the United States as a good investment, so they're willing to buy our cash.
Ben: Buying cash? How does that work?
Mr. G: What they buy are treasury bonds. The government, when it wants, can just sell more bonds. We say, "we'll loan you this money for 10 years, and we'll give you a note saying we'll pay you interest."
Ben: So what's the long-term problem?
Mr. G: Part of it is the interest payments. If you don't make them, or if the investors worry that you might not be able to make them, then no one will buy the money, and you're in trouble. We'd have to raise interest rates to get more people to buy them. Then everyone in the United States will pay more for college loans, car payments, mortgages, and so on. The fear is that it could really hurt the standard of living. And I hate to pick on Congress, but they're really acting like it's a no-limit credit card.
Ben: How does that relate to GDP? Like, this sentence from a Brookings report. "In fiscal year 2004, the cyclically-adjusted deficit is projected to be about four percent of GDP."
Mr. G: What do you mean?
Ben: Please translate that, if you would. From gibberish into English.
Mr. G: Gibberish? Do you remember anything I taught you?
Ben: Everything but that.
Mr. G: Can I revoke your diploma?
Ben:
Mr. G: GDP is the value of all the goods and services produced in the country in a given year. They are saying they will incur about 4 percent of GDP in debt. And that's on the conservative side.
Ben: So how far can they run up the debt?
Mr. G: Well, you can't just keep borrowing $500 billion a year. Right now, the G8 wants our debt cut in half by 2009. Bush says he'll do it by the end of his term.
Ben: Do you think he'll do it?
Mr. G: Well, one thing is he can't make the tax cuts permanent. And I think he got himself boxed in with the war. No matter what you say, Republican or Democrat, you really have to support the soldiers. And also remember, that money's not even in the budget right now. So long term you've got some pretty expensive spending, and if you don't want to touch the revenue side, then you've got some pretty expensive debt.
Ben: What's one thing you think people are missing in this debate?
Mr. G: We've gone away from the discussion about the revenue side. No one wants to talk about taxes. But at some point we might have to look at the people who benefited most from this economy, and ask them, what can you contribute? No one wants to sacrifice, but the way they are spending, someone will have to sacrifice.
Ben: It's funny that we once thought we had all this figured out.
Mr. G: Oh yeah, that was amazing. We really thought we had the business cycle cured. That's how it is, though. World events can throw all these models right out the window.
The moral of the Grandits analysis? The sky is not falling. We have time to fix the problem. But we have to start now, by not making the tax cuts permanent, not spending more money than we take in, not going headlong into any foreign wars.
And not revoking my diploma.
