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The Return of the Deficit

The federal budget deficit for fiscal 2003 will be the largest in American history, according to the White House. The estimate is that the deficit will run to $455 billion for the year. It breaks all records by billions. The highest deficit up until this year was $290 billion in 1992 when George Bush Sr. was president.

In between the two Bushes, during the Clinton years, the deficit fell from $290 billion to $22 billion in 1997 and then turned into a surplus of $236 billion in the year 2000.

Under Bush Jr. deficits made their return. Just a half a year ago, the White House announced that the budget would be running a sizable deficit of $300 billion. In this brief period, the forecast is a deficit that will have risen by 50%.

This runaway budget deficit should be a source of considerable concern to the administration. But it isn’t. Serenely, the new director of the budget, Joshua Bolten, assures us that a deficit of such unprecedented magnitude is “manageable if we continue pro-growth economic policies and exercise serious spending disciplines.” To the informed who know that Iraq is costing Uncle Sam nearly $4 billion a month and who see the unemployment rate and business bankruptcies soaring, Bolton’s words sound like a nonchalant non sequitur.

What is not revealed in all this talk about budget deficits is that for years budget deficits have been distorted to fool the public into believing that the federal budget was in better condition than it really was. It started with President Lyndon Johnson. In his last years in office, Johnson was burdened with costly wars in Asia. To pay for them, he should have raised taxes. But since there was an election coming up, Johnson was hesitant to do so. Instead, he indulged in creative accounting.

He knew that the Social Security Trust Fund had been running surpluses for many years. So, he decided to merge the pluses of the Social Security Trust Fund with the minuses of the U.S. Treasury — although the Trust Fund was, and is, an independent entity whose surpluses, by law, must be invested in government securities. (Uncle Sam has been paying interest on those funds to the Social Security Trust Fund that now has assets of close to a trillion dollars.)

Johnson’s little ploy has, ever since, been formalized in the annual report of the President’s Council of Economic Advisers. In that report there are three different budgets: the “On-Budget” budget, the “Off-Budget” budget and the unified budget.

No president has offered to put an end to this false reporting that counts borrowed money as “income” because this deception makes the budget look better than it is. During the last few years, the Social Security Trust Fund and a few other quasi-governmental funds such as the United States Postal Service and the Highway Trust Fund have jointly been running surpluses of about $150 billion a year. As a result, true government deficits have been and still are understated.

But shortly, these “off-budget” operations, especially the dominant Social Security Trust Fund, will become a burden rather than a blessing. The post-World War II baby boom generation is coming of age, getting ready to retire. The drain on the Social Security Trust Fund will in time exhaust the reserves, and a big plus may turn into a burdensome minus — as the painful truth about the budget is finally revealed.

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