The Seven Deadly Deficits: What the Bush Years Really Cost Us

By Joseph Stiglitz, Mother Jones. Posted December 22, 2008.

The accountability deficit: The moguls of American finance justified their astronomical compensation by their ingenuity and the great benefits it supposedly bestowed upon the country. Now the emperors have been shown to have no clothes. They did not know how to manage risk; rather, their actions exacerbated risk. Capital was not well allocated; hundreds of billions were misspent, a level of inefficiency much greater than what people typically attribute to government. Yet the moguls walked away with hundreds of millions of dollars while taxpayers, workers, and the economy as a whole were stuck with the tab.

The trade deficit: Over the past decade, the nation has been borrowing massively abroad -- some $739 billion in 2007 alone. And it is easy to see why: With the government running up huge debts, and with Americans' household savings close to zero, there was nowhere else to turn. America has been living on borrowed money and borrowed time, and the day of reckoning had to come. We used to lecture others about what good economic policy meant. Now they are laughing behind our backs, and even occasionally lecturing us. We've had to go begging to the sovereign wealth funds -- the excess wealth that other governments have accumulated and can invest outside their borders. We recoil at the idea of our government running a bank. But we seem to accept the notion of foreign governments owning a major share in some of our iconic American banks, institutions that are critical to our economy. (So critical, in fact, we have given the Treasury a blank check to bail them out.)

The budget deficit: Thanks in part to runaway military spending, in just eight short years our national debt has increased by two-thirds, from $5.7 trillion to more than $9.5 trillion. But as dramatic as they are, these numbers vastly understate the problem. Many of the Iraq War bills, including the cost of benefits for injured veterans, have not yet come due, and they could amount to more than $600 billion. The federal deficit this year is likely to add up to another half-trillion to the nation's debt. And all this is before the Social Security and Medicare bills for the baby boomers.

The investment deficit: Government accounting is different from that in the private sector. A firm that borrows to make a good investment will see its balance sheet improved, and its leaders will be applauded. But in the public sector there is no balance sheet, and as a result, too many of us focus too narrowly on the deficit. In reality, wise government investments yield returns far higher than the interest rate the government pays on its debt; in the long run, investments help reduce deficits. To cut them is penny-wise but pound-foolish, as New Orleans' levees and Minneapolis' bridge attest.

There are two hypotheses (besides simple incompetence) about why Republicans paid so little attention to the growing budget shortfall. The first is that they simply trusted in supply-side economics -- believing that, somehow, the economy would grow so much better with lower taxes that deficits would be ephemeral. That notion has been shown for the fantasy that it is.

The second theory is that by letting the budget deficit balloon, Bush and his allies hoped to force a reduction in the size of government. Indeed, the fiscal situation has grown so scary that many responsible Democrats are now playing into the hands of these "starve the beast" Republicans and calling for drastic cuts in expenditures. But with Democrats worrying about appearing soft on security -- and therefore treating the military budget as sacrosanct -- it is hard to cut spending without slashing the investments most important to solving the crisis.

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Joseph Stiglitz, a Nobel laureate, is a professor of economics at Columbia University.

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