A third straight year with a $1 trillion-plus budget deficit: That’s what President Obama proposed today in his budget request for fiscal 2011 (the budget year beginning this October).
The White House does project that by 2015 the deficit will fall to half of this year’s level. For some perspective, however, the 2015 deficit would still be almost as large in inflation-adjusted dollars as the combined deficit of any two years between the end of World War II and 2009.
Democrats will have to bear that budget as they try to avoid repeating last month’s shocking loss in Massachusetts on a national scale in November’s mid-term elections. And that’s assuming Congress doesn’t increase the deficit even further. This is essentially a bet against the tea-party movement, even though the tea partiers are more likely to gain strength and momentum this year, as the Instapundit, Glenn Harlan Reynolds, argues here.
But even the still-historic deficit levels projected in 2012-2015 may be too good to be true. What’s left unsaid, or at least buried in the budget documents, are these two things:
1. the White House assumes that the economy of 2011-2015 will be as hot as it was during the go-go years of the late 1990s — growing at least 3.5 percent a year for five straight years (a feat we didn’t accomplish during the ’80s or the ’90s); and
2. these growth figures depend on inflation remaining lower in the next decade than it was in the last decade, even though the Fed in the last couple of years has been creating money at an unprecedented rate.
Neither of these assumptions seems likely to come true. First, which industries are likely to replicate the growth that we saw, chiefly in information technology, in the late 1990s? Not “green” energy, not by a long shot.
Second, how exactly is the Fed going to rein in all of the dollars it’s been letting loose since the beginning of the housing crash? Even if Ben Bernanke & Co. time it just right, it’s probably impossible for them to keep inflation at the low levels that the Obama budget writers assume.
Even if inflation is just as benign as it was during the Bush administration, it’s likely to knock at least a percentage point off the GDP forecasts made by the Obama administration. That would put the economy on roughly the same growth trajectory as during the Bush years.
I’m not sure what exactly that would do to revenues, but I am sure that they would suffer somewhat. Some of our debt would become cheaper to service, but the history of devaluing one’s way to prosperity is not good. Deficits would widen accordingly.
Bottom line: As bleak a picture as the administration paints, things probably aren’t even that cheerful. There is no time to waste in cutting spending and the deficit.
