The government of the United States is running $1 trillion budget deficits annually. It also faces tens of trillions in unfunded liabilities, primarily in Medicare, the health care system for retirees. On its current course, the government will become insolvent, which is to say unable to meet its obligations and promises.
Currently in Washington, lawmakers and the president are fashioning what is presumed to be a compromise that will avoid upcoming (Jan. 1) spending cuts and tax hikes so that the nation will not slip into another recession. A recession would have a negative impact on government revenues, complicating the budget problems, in addition to hurting citizens. As part of the compromise, it is assumed that lawmakers will craft some type of pact to also deal with the long-term structural budget problems. We'll see. In any case, there is something important that the public should know:
When Washington talks about budget cuts, they are not talking about actual, year-to-year cuts in spending. Spending will continue to rise from 2012 to 2013 to 2014 and so on. So what are they talking about? The "cuts" are reductions in increases. Even after a budget compromise, the nation will continue to run budget deficits each year. They'll just be smaller.
So, in Washington, if you run a $1 trillion deficit, that's troubling. If you trim it to $500 billion, you think you have accomplished something. Putting off the day of reckoning, perhaps?
What the country needs is real reform. Fiscal sanity should work this way: The government figures out how much it can raise in taxes without hurting economic growth. (Its goal should be low taxes in a competitive world economy.) After revenues are known, spending priorities can be established. Spending should then match revenues, which grow with the economy.