Welcome to America's $2 Trillion Budget Deficit

Obama, Democrats may push extravagant infrastructure spending programs.

By + More

Barack Obama has already said that America's "investment deficit" will take priority over its budget deficit. And congressional Democrats have been waiting a generation to launch a full-scale infrastructure spending spree. How might this combination play out in 2009? Well, I may have glimpsed a possible financial future in a proposal for an "economic recovery program for the post-bubble economy" sent to me by the left-of-center New America Foundation and authored by businessman Bernard Schwartz and think tanker Sherle Schwenninger.

First, Schwartz and Schwenninger assume a worst-case scenario for the economy—that the housing recession and rising unemployment will suck $475 billion out of consumer spending. Moreover, rising food and gas prices will drain another $300 billion. (These calculations adopt the guesstimates of Merrill Lynch econobear David Rosenberg.)

Second, Schwartz and Schwenninger assume a worst-case analysis of U.S. infrastructure needs. They accept at face value the mind-boggling estimate of the American Society of Civil Engineers that America needs to spend $1.6 trillion over the next five years to bring our basic infrastructure up to world standards. (The GAO estimate, on the other hand, is that our needs are maybe $400 billion over 20 years.) And on top of that, the duo say, we need to spend "sizable sums" on newer infrastructure needs such as broadband access and an upgraded energy grid. Plus, don't forget all that government investment on alternative energy research.

A rough estimate of the cost of this New New Deal would be close to $500 billion a year, maybe $775 billion if Uncle Sam is to completely offset the drop in consumer spending predicted by Rosenberg. Now, as it is, the government is expected to run a $500 billion deficit next year. So the S&S plan would put that budget deficit at over $1 trillion. And if you tack on a potential $500 billion to $1 trillion bailout of the banking industry, that $1 trillion deficit could conceivably double to $2 trillion.

Now I'm not one to get skittish about budget deficits when they are merely a percentage point or two of GDP, especially since it's entitlements that pose the truly scary debt issue (some $55 trillion in future liabilities, getting worse by $2 trillion to $3 trillion every year as we do nothing). But a $2 trillion budget deficit would be, like, 15 percent of GDP. That would be the highest level since World War II and more than twice as high as the postwar peak of 6 percent in 1983.

I can't believe the global bond and currency market vigilantes wouldn't completely freak, sending U.S. financial markets into chaos. Talk about a worst—though entirely possible—case scenario.


TAGS:
deficit and national debt
Obama, Barack
fiscal policy

You Might Also Like