SAME OLD BUDGET STORY

You know the trouble with growing old – you suffer from creaky budgets, swollen deficits, fallen entitlement programs. And let’s not even talk about the number of times you have to get up in the middle of the night to raise interest rates. Pretty bleak, but when the baby boom generation retires, that’s what could happen in Washington given the current path of federal taxing and spending.

Former Treasury Secretary Robert E. Rubin, with Peter Orszag of the Brookings Institute and Allen Sinai, the chief global economist of Decision Economics, recently issued a white paper on the effect on the U.S. economy of budget deficits, and they concluded the burden of a total deficit of around $5 trillion during the next decade will make growing old seem like child’s play. Fortunately, unlike people, federal budgets can be regularly rejuvenated, although the time between now and a sharply increased demand for federal services caused by a retirement boom is brief.

Conventional views, say the authors, are that budget deficits lead to increased foreign borrowing, which in turn increases deficits. “The reduction in domestic investment (which lowers productivity growth) and the increase in the current account deficit (which requires that more of the returns from the domestic capital stock accrue to foreigners) both reduce future national income, with the loss in income steadily growing over time.”

What is unconventional and worrisome, they say, is that this harmful cycle may not occur gradually, as generally expected, but could be triggered quickly by a loss of investor confidence. “Substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad,” they say. This lack of confidence may not be fair or even grounded in administration policy, but its effect on the economy is quite real and could be dramatic.

The cascading series of problems that results in higher interest rates, a falling stock market and a drop in the value of the dollar may be traced to deficits that in turn may be ascribed to over-spending. But that’s only half the equation, and it is worth noting that spending as a percentage of gross domestic product is low compared with the last 30 years. Tax cuts are equally to blame – at least as equally, about $3 trillion of the total – and more will be considered by Congress as it returns to session next week.

Mr. Rubin said Tuesday in a conference call with reporters sponsored by the Center on Budget and Policy Priorities that the rising deficits may have risks “that could be very substantial and could have a severe impact on the economy” that will be accelerated by the retiring baby boomers, the first of whom turn 65 in 2011, and quickly double the percentage of U.S. seniors. This is a view shared by both liberal groups such as the CBPP and business-oriented groups, such as the Committee for Economic Development. Former Treasury Secretary Paul O’Neill recently said he warned of the same risks as the first round of Bush administration tax cuts were being considered.

The deficit is one of those dreary topics that only members of Congress stumping for a Balanced Budget Amendment used to worry about. Where did those members of Congress go, anyway?