NCPA - National Center for Policy Analysis

Inflating Our Way Out of Long-Term Budget Deficits

February 13, 2003

A recent study by economists at the University of California at Berkeley reaches a grim conclusion: the federal budget will be $1.9 trillion in the hole over the next 10 years. If surpluses in Social Security, Medicare and other retirement programs are removed from the equation, the deficit grows to $5.4 trillion.

That is vastly different from the Congressional Budget Office's (CBO) August forecast of a $1 trillion surplus over the next 10 years.

Although the economists started with the budget office's numbers, they made four substantially different assumptions which they believe are more politically realistic than CBO expectations.

  • The CBO assumes that real discretionary government spending will remain constant over the 10-year period, but the researchers argue that real discretionary spending will grow at the same rate as gross domestic product -- as it has in the past.
  • The budget office assumes all temporary tax provisions will expire as scheduled, but the researchers believe most will be extended.
  • The Berkeley researchers see the alternative minimum tax being revamped so that it applies only to the same fraction of taxpayers that it does now -- about 3 percent.
  • Finally, the researchers eliminate the impact of current retirement program surpluses.

That's how the economists reach their $5.4 trillion deficit figure.

Berkeley economics professor Hal R. Varian makes suggests some ways to deal with the deficit. But he says that if nothing is done, printing money and inflating away the debt may be the only solution left.

Source: Hal R. Varian (University of California, Berkeley), "Economic Scene: Deficit Forecasts Are Grim, But Avoiding Political Pain May Be All Too Tempting," New York Times, February 13, 2003.

 

Browse more articles on Tax and Spending Issues