Explaining the Deficit

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Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Roben Farzad, senior writer for Bloomberg Business Week, explained why the federal debt is so high--and previews what the political debate about the deficit will hinge on.

Despite Friday night's moment of budget agreement, there is more trouble ahead — what to do about the growing deficit.

Congressman Paul Ryan (R-WI), Chairman of the House Budget Committee, has a plan. He recently announced a decade-long plan to reduce this high debt, citing significant cuts to Medicare and Medicaid. In the meantime, in order to avoid default on the Fed's loans, the President is pushing for Congress to raise the virtual deficit roof. Not everyone agrees, and in 2006, he didn't either. When the president was a senator, he voted against raising the deficit ceiling. On Wednesday afternoon, he'll give a "major speech" in which he plans to discuss the 2012 budget and his thoughts on what should be done about the looming deficit.

Solving this problem is a balancing game.

The late 1990's was the last time the government was running surpluses, but the economy was humming along then and we also had higher income tax rates, which were cut when Bush came to office (and extended by President Obama). Roben Farzad of Bloomberg Business Week said there are two pieces to balancing this puzzle.

There's the revenue side of this and that's a euphemism for tax cuts and tax increases and there is the budgetary side of it where you're wondering, gosh, can we cut things here and there to kind of maybe make the spending numerator maybe smaller.

Rep. Ryan's plan is also riding a fine line for a deficit fix, according to Farzad.

He's trying to, I don't want to say have his cake and eat it too, but it's interesting in that it's cutting the top tax rate from 35 percent to 25 percent so already if we've had lower than average historical top marginal tax rates over the past decade, you're going to get even ostensibly less revenue...so can you cut potential revenue coming in and cut spending at the same time and ultimately produce a smaller gap. He claims that he can, to the tune of $2 trillion less in deficit spending than Obama's plan.

Farzad went on to say that the plan doesn't even produce an annual surplus or a balanced budget in ten years.

It produces deficit spending in the next decade, I mean we still have a $16 trillion debt under Ryan by 2021, versus 19 trillion. These people can fudge the numbers by saying, then that's just the multiple of GDP. So, there are a lot of moving parts, there are a lot of inputs that you put in this thing and the devil is certainly in the details.

Debt can be a good thing.

Alexander Hamilton was the first U.S. Secretary of the Treasury. He believed you shouldn't just operate at "break even" but that people should aim to live above their means a little bit. It helps the economy grow.

And that's somewhat been vindicated for all the massive deficits that we're rolling over right now. We have $14.3 trillion and an estimated $19 trillion in ten years, bond yields are ridiculously low, the Chinese still lend to us, people still buy government bonds so we're not being punished by bond vigilantes. Having said that, if there is going to be a game of chicken over the debt ceiling and you see interest rates creep up, that could really make debt payments go up even more.

The Tea Party's role is significant in how this deficit talk plays out.

Congressman Paul Ryan's plan to reduce the deficit carries a lot of cuts the Tea Party favors, cuts that may not have been a part of the debate without them.

The [political] fault lines are here in that the Tea party won a huge victory in the Congressional beat down and when you have someone like Rep. Ryan coming out and touching third rails of government...talking about slashing Medicare, talking about really representing the Tea Party agenda in certain elements, in that you could simultaneously cut the top tax rate and cut spending, you're really forcing the administration's hand. They're king of saying, well we're putting political skin in the game and now we're going to force you to come out and sacrifice some of your fiscal sacred cows.

Current spending breakdown:

Ryan's plan introduces several cuts. Here's Farzad's breakdown of what the federal government spends on the big ones.

Medicare:

On a static level, every year you look at the budget, roughly the stuff adds up to to 24, 30 percent, Medicaid less than Medicare. But Medicare is a huge entitlement and especially because you have the asymmetry of the government coming out there and effectively making a blank check type entitlement and on the other side of that is the private sector where prices have been going up way above the cost of inflation, so the deficits within just that slice every year balloon. So he is at least making an effort to try to get some sort of cut sustainably out of medicare as a block grant.

Medicaid:

Medicaid is less than that. $735 billion of the federal government goes to Medicaid. You have state matching as well.

Military:

Between 20 and 25 percent and that is something that is kind of a sacred cow within Ryan's budget proposal. No Social Security, no defense cuts and that's something that has really retained a third rail status.

One thing that IS running a surplus is Social Security, for now.

Social Security has been in pretty good shape since it came into existence, but the federal government has been borrowing money from this stash for operating expenses. Farzad said, we also can't depend on too much, now that the baby boomer generation is starting to qualify.

That's why it's so murky to look into that crystal ball and say we can count on Social Security surpluses. There are people out there that are saying, the whole system is going to be broke by 2030, so don't count on it as being a nest egg out there, it's going to be a huge drain if certain cuts aren't made, for example lifting the age for Social Security.

The federal government wasn't even supposed to use that money, since it was in a "lock box" for future Social Security needs, Farzad said.

And in corporate America that would be construed as accounting fraud, but Washington goes by its own generally accepted accounting principles.