NCPA - National Center for Policy Analysis


September 8, 2009

While the deficits caused by the fiscal stimulus package will end in 2011 and will help to sustain a fragile recovery in 2010, the deficits projected for the longer term are a threat to our economic future.  The starting point for controlling those future deficits is for Congress to abandon the administration's health care plan -- a plan that will cost more than $1 trillion, says Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan and a professor at Harvard University.

The deficits projected for the next decade and beyond are unprecedented.  According to an assessment released in March by the Congressional Budget Office (CBO):

  • The president's budget implies that deficits will average 5.2 percent of gross domestic product over the next decade and will be 5.5 percent of GDP in 2019.
  • Without the president's proposals, the budget office forecasts a 2019 deficit of only 2 percent of GDP.
  • The CBO's deficit projections are based on the optimistic assumptions that the economy will grow at a healthy 3 percent pace with no recessions during the next decade; that there will be no new spending programs after this year's budget; and that the rising national debt will increase the rate of interest on government bonds by less than 1 percent.
  • More realistic assumptions would imply a 2019 deficit of more than 8 percent of GDP and a government debt of more than 100 percent of GDP.

Such enormous deficits would crowd out productivity-enhancing investments in new equipment and software as the government borrows funds otherwise available to private investors.  The result would be slower economic growth and a lower standard of living, says Feldstein.

In the nearer term, the projected deficits could cause interest rates on bonds and mortgages to rise sharply if bond investors fear that the government will not prevent inflation.  This is a greater risk now that more than half of the U.S. government debt is held by the Chinese and other foreign investors.  Such an interest rate rise could kill a recovery in 2010 or 2011 and depress growth in the years that follow, says Feldstein.

Dropping the Obama health plan would significantly reduce fiscal deficits over the next decade and help restore public confidence in the ability of Congress to control spending.  The CBO estimates that the House committee versions of the Obama health plan would add more than $1 trillion to federal deficits over the next decade.  But the actual costs would be much higher.

For starters, $1 trillion of extra debt-financed spending would cause the government to pay about $300 billion of extra interest in the next decade.  Moreover, the CBO's method of estimating the cost of such a program doesn't recognize the incentives it creates for households and firms to change their behavior, says Feldstein.

Source: Martin Feldstein, "ObamaCare's Crippling Deficits," Wall Street Journal, September 8, 2009.

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