President George W. Bush does not think deficits matter. I agree with him on many issues, but not on this one. However, the voters have spoken. Since I am a believer in democracy, I accept the will of the people, so I will climb off my soapbox and try to confine my remarks to what I think will happen to fiscal policy in the future and how it will affect the economy.
There is no question that the U.S. federal budget deficit will increase over the next four years. You can take that to the bank. Existing tax cuts will become permanent. New tax cuts will be added. And no attempt will be made to curb spending programs. Indeed, a great deal more will be spent on Medicare.
Let's go back to Economics 101. There are three ways to pay for a bigger government deficit. First, the government can monetize it, commonly known as "printing money." Since this is highly inflationary, no industrialized countries like the United States choose that option any more. Second, we can ask foreign investors if they would like to take their excess dollars -- a product of America's international trade deficit -- and invest them in Treasury securities. And third, we can use the mechanism of higher interest rates to entice domestic investors to buy Treasury securities instead of putting their money into stocks or investing in new plants and equipment. This practice is generally known as "crowding out."
As Porky Pig used to say, "That's all, folks." There are no other choices.
Capital spending is currently 10.5% of GDP. Excluding software and leased motor vehicles, which some think are more akin to consumption than investment, the figure is 8%. Since these figures are in line with previous experience for this stage of the business cycle, we can rule out crowding out -- so far. There's also been no rise in bond yields or in the rate of inflation. That means foreign investors are picking up the deficit tab, thank you.
By now the whole world knows that Bush plans to ask for legislation that will make his existing tax cuts permanent, and provide further tax incentives for personal saving, and few doubt these will be passed. However, the changes that might be made for Social Security and Medicare are still up in the air.
You want to know how to fix Social Security? I'll tell you. This is not "advice." It's just arithmetic. If the government were to make one minor change in the law, substituting the words "implicit consumption deflator" for "consumer price index," the benefits at the end of the life of someone who is just now starting to work would be cut by more than half. Yet the twin 800-pound gorillas in the room are Medicare and Medicaid. Everyone who is over 65, and possibly some who are not, knows that the individual payment for Medicare Part B will rise from $66.60 to $78.20 per month for 2005. Unless my calculator is broken, that is a 17.4% increase. If such growth rates continue indefinitely, it would take only 15 years before the Medicare payment would be greater than the Social Security benefit. But before you reach for your word processors to remind me that the increase in the Medicare Part B payment cannot exceed the increase in the Social Security benefit, let me say, "Of course, I know that."
My point is that in just a few years we are heading for a Medicare and Social Security collision in which, under existing law, whichever choice the government makes is illegal. Something has to give. But this issue is not even being discussed. Yes, I know how to fix the health-care crisis. Hint: Let people make their own choices with their own money. In the meantime, get ready to enjoy those bigger deficits. After all, you voted for them.
Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.