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Part 1. Introduction to the Budget Series – The Federal Budget, Budget Deficit, and National Debt

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2012 is the year of the budget wonk.

Media coverage of the federal budget, the budget deficit, and the national debt is seemingly everywhere.  For a topic that is usually viewed as the boring province of actuaries and accountants, the recent flood of attention has been extraordinary.  Far from ignoring the budget, television networks like MSNBC are even using their coverage of the subject to draw viewers.  Social Security and tax rates – not normally the stuff of thrillers!

But now is not a normal time, as almost everybody seems to have realized.  Coming out of a deep recession – and after a bruising series of battles over trillions of dollars of stimulus spending, debt ceiling increases, tax cuts, and changes to the largest entitlement programs in the world – many Americans understand that the country is confronting the most important set of budgetary questions since the end of World War II over half a century ago.

Yet just because the budget is important, doesn’t mean that it’s easy to talk about.  In fact, quite the opposite.

As the focus of the Presidential election, debate over the budget has become even more politicized and polarized than it usually is.  Commentary has grown inflamed, making it difficult to have a serious discussion of the major issues confronting our country.  When Harvard professor Niall Ferguson wrote about Obama’s record on the budget in a recent cover story in Newsweek, he faced a vociferous wave of criticism from pro-Obama bloggers that resembled a digital lynch mob more than a reasoned debate.[1]

Bizarrely, the Presidential candidates use many of the same points when attacking each other on the budget, making it difficult for voters to understand how their policy positions differ.  “He wants to cut your Medicare!”  “No, he wants to cut your Medicare!”

Most fundamentally, the budget is difficult to talk about because it is extraordinarily complicated.  After all, it covers an amount of spending that is equivalent to the entire economic output of Germany, and it is a patchwork of exceptions, exemptions, deductions, and formulas.

Politicians are rarely motivated to be transparent and open, and it’s worth noting that many budgetary provisions were purposefully designed to complicate and obfuscate so that they would be difficult to scrutinize.

Recourse to “experts” is often of little use.  Policies related to the budget, known as “fiscal policy” by economists, are relatively under-studied by economists.  At the Federal Reserve’s annual conference in Jackson Hole, Wyoming – one of the world’s most prestigious gatherings of economists – participants recently contrasted fiscal “alchemy” with the more “scientific” results that economists have generated in other areas, such as monetary policy.[2]

Additional uncertainty is injected into the situation because many of the effects of fiscal policies only become clear over very long time periods – a decade or more – and are very sensitive to assumptions around future growth rates, interest rates, unemployment rates, and so forth.  Budgetary forecasts or predictions are therefore notoriously unreliable.

The bottom line is that it is difficult to draw many hard and fast conclusions from the work that economists have done on fiscal policy, except that, at a certain point, countries with lots of national debt tend to fare poorly.[3]  But you probably didn’t need a Ph.D. in economics to realize that.

Cognitively, it can be difficult to understand changes to budget policy.  Many changes seem small, abstract, or pedantic – a change to the formula used to adjust Social Security benefits for inflation, for example, or a change that will move the deficit by 1% of GDP (1%?  How big could that possibly be?  A cool $150 billion dollars, it turns out).

Finally, the highly-salient examples of budgetary phenomena that we do run across in our daily lives can be terribly unrepresentative of the average across the entire country – which is why, as we will see in a later post, inferring from Mitt Romney’s tax rate that wealthy people pay a lower tax rate than the middle class is dead wrong.

In this series, I will provide an introduction to the federal budget, budget deficit, and national debt.  The series is aimed at the large portion of the American public that understands how important our current debate is, and seeks an impartial, unbiased introduction to the major issues and themes that are being covered in the media.

Where possible, I will point out the relevance of budgetary issues to your daily life, and the impact that you may feel from the various proposals that the presidential candidates and others have put forward.

Personally, I am glad that the public is becoming more engaged with our country’s fiscal policy.  For better or for worse, the impact of the federal budget on our lives is huge.  As citizens, we need to inform ourselves so that we know how to plan our own finances – how much we need to save for retirement in addition to what we expect to receive from Social Security, for example – and so that we can vote on issues that matter to us.

Given the enormous powers of taxing and spending involved in the federal budget, as citizens we need to actively monitor our nation’s fiscal policy, so that it is used to enhance the freedom and rights of Americans.  After all, our country was founded at least partly in response to feelings that citizens were being taxed oppressively.

This series will start with the most fundamental question:  why do we care about the budget deficit and national debt anyway?

We will then move on to the major topics on which big decisions will be needed soon:  What’s next for the budget, with the upcoming election and the so-called “fiscal cliff” looming at the end of the year?  What is in Paul Ryan’s budget plan, anyway?  What is in Obama’s budget plan?

Finally, we will discuss the areas that are likely to see the greatest policy changes over the coming years:  taxes and the debate over inequality, healthcare and the debate over cost and access, and defense and national security.

Along the way, please do ask questions and offer comments.  If specific areas emerge where I receive a lot of questions, I will write a post delving into that topic as well.

Without further ado, let’s begin!

Look forward to the next post of the series in two weeks’ time, titled, “Why do we care about the budget deficit, anyway?”