Treasury official defends president’s budget

The day before U.S. Treasury Secretary John Snow went to Capitol Hill to defend President Bush’s 2007 federal budget, one of his top aides visited Virginia Commonwealth University.

Mark J. Warshawsky, assistant secretary for economic policy, gave a condensed version of the details and discussed recent economic issues last Monday. He outlined the president’s plan to keep inflation low, employment high and the deficit manageable.

Warshawsky said the federal budget deficit ballooned to $354 billion in 2005, an all-time high.

Though the deficit may be huge now, he said, it has to be considered in context. The “war on terror” and hurricanes Katrina and Rita have driven up government spending in recent years, but financial goals sometimes conflict with urgent needs, he said.

“The deficit is one of the main measures of fiscal policy,” Warshawsky acknowledged. But trying to put it in perspective, he said the nation’s gross domestic product is growing at about 3 percent a year, and the budget deficit represented a manageable 2.6 percent of GDP in 2005, Warshawsky painted a rosy picture of the economy using other major indicators. He said that inflation is in check and that the United States is near full employment, with almost 5 million jobs added since 2003.

Edward L. Millner, economics and business chair at VCU, agreed with Warshawsky’s assessment. “The market for government debt (Treasury bonds) is very robust. People are not worried about inflation or that the government will default,” he said.

Carol Scotese Lehr, associate professor of economics at VCU, worried that “the Bush administration’s predictions are pretty optimistic about growth” and the budget doesn’t include spending on Iraq.

Warshawsky said he is concerned about the long-term future of the federal debt. He said Bush wants to rein in spending on entitlements such as Social Security, Medicare and Medicaid.

“Without policy changes, entitlement spending will cause deficits to explode,” Warshawsky said. Otherwise, because of rising health care costs and an aging population, all federal revenues would be going to entitlements by the year 2080 – and there would be nothing left for defense, he said.

“Without policy changes, entitlement spending will cause deficits to explode.”

– Mark J. Warshawsky
Assistant secretary for economic policy

Millner again agreed with Warshawsky.

“Medicare and Social Security are time bombs we know are out there, and they are going to explode relative to anything we’re talking about with deficits.”

Current deficits may not be permanent liabilities, according to Warshawsky, but won’t they add to the problem when the horizon shows a mushroom cloud of future debt?

Lehr had her reservations. “(Warchawsky) is the administration,” she said, “The administration is going to downplay the short-term deficit.”

The danger of a large deficit is that “short-term interest rates are higher, which could trigger a long run increase in the real interest rate,” she said. In that scenario, the U.S. economy would suffer.

Warshawsky said the president’s 2007 budget is intended to reduce the deficit, although deficits would first increase in 2006. To control spending the president has proposed three major initiatives, which he first outlined in his Jan. 31, 2006 State of the Union speech.

With one initiative the president hopes to improve the U.S.’s future competitiveness in math and science, two education programs that have a large impact on technology and productivity.

Second, the president supports improvements in technology and energy use that should drive output higher, which would mean higher incomes for consumers and the government alike.

Third, he wants to put people in charge of their own health care. That should impel Americans to become better health care consumers, which should hold down medical inflation. Also, it would put more wages directly into workers’ hands, rather than companies diverting a portion into insurance programs with huge costs. Furthermore, the president wants to provide tax breaks to those who open insurance accounts with high deductibles.

Lehr questioned policies that will reduce tax revenue, adding to the current deficit, when the future deficit is the problem the government wants to fix. “The emphasis on keeping the tax cuts in a high deficit environment reinforces the deficit,” she said.

Near the end of his presentation Warshawsky told his listeners that the implementation of the president’s budget and policies should begin to shrink the deficit.

An audience member asked Warshawsky which of the policies has the best chance of being adopted by congress. “Each has a possibility,” he replied.

After thinking a moment, he said, “Energy and competitiveness. Actually, I don’t know. In an election year it’s very difficult to have restraint on government spending.”