PAUL SOLMAN: The new budget is out, and somewhere in those phonebook-thick volumes is a number that's struck a chord.
The country is running more than half a trillion dollars a year in the red, and shortly after the announcement, Federal Reserve Chairman Alan Greenspan included deficit concerns in a sobering report to Congress.
ALAN GREENSPAN: Budget projections from the Congressional Budget Office and the Office of Management and Budget indicate that very sizable deficits are in prospect in the years to come.
But federal budget deficits could cause difficulties even in the relatively near term.
PAUL SOLMAN: Democrats, meanwhile, have been quick to seize the moment.
SEN. KENT CONRAD: This means that the country, under President Bush's budget, is spending $900,000 a minute more than we're taking in -- $900,000 a minute.
PAUL SOLMAN: A group formed to oppose President Bush, MoveOn.org, has made a TV ad blaming the president for deficits that will supposedly saddle the next generation with debilitating debts.
That's a trillion dollars if you count both this year and last; more if you project ahead.
But no matter how you slice it, it's money that has to be borrowed and paid back. That has again brought the deficit problem to the fore -- a problem we're going to try to explain.
While critics blame tax cuts for the deficit, the administration says it's due to lower government revenues, and Iraq, and promises that future deficits will be lower.
JOSHUA BOLTON, Director, OMB: Today's deficit is certainly understandable, but that deficit is also undesirable and unwelcome. And with Congress's help, we will bring it down.
PAUL SOLMAN: Or as the president put it in his recent State of the Union Speech:
PRESIDENT GEORGE W. BUSH: We can cut the deficit in half over the next five years.
PAUL SOLMAN: Short-term, the administration and many economists argue, the economy was in recession, so it needed a boost.
Borrowing money to engage in deficit spending, they say -- for the military, for the president's tax cuts -- has gotten America off the ground. Now that the economy's moving again, deficits should come down.
But before asking if they really will, why do both the administration and its critics say deficit reduction is such a big deal?
Well, in the long run, says economist Ben Friedman, economic growth is hurt by government borrowing, which is competing for money against the private sector.
BEN FRIEDMAN: It's competing against the General Motorses and the General Electrics of the world that might like to borrow money to put up a new factory or to modernize an old factory. It's borrowing against anybody who's running a small business or a plumbing shop that would like to modernize and expand. And guess who wins when the Treasury competes with either people like you or me or even with the General Motorses? The Treasury always wins.
PAUL SOLMAN: The Treasury wins because it can pay a higher interest rate, and thus divert money from private so-called capital investments for future growth. The president's economic adviser, Greg Mankiw:
GREGORY MANKIW: I think the mainstream economics profession says that yes, budget deficits do have an adverse impact on economic growth, because budgets deficits tend to crowd out private capital accumulation.
And that's one of the reasons why a budget deficit is a concern and why the president wants to ... wants to get the budget deficit down.
PAUL SOLMAN: Now there's skepticism about such reduction, even among Republicans in the Congress. The president wants to make his tax cuts permanent, and his numbers assume holding government spending far below its historical growth rate.
Wyoming Sen. Michael Enzi thinks that would be uncharacteristic of Congress.
SEN. MICHAEL ENZI: We're not very good at cutting anything. We're not even ... not even good at slightly reducing things. What we go into, particularly in an election year, is we go into a phase of trying to outbid each other on every program that comes along.
PAUL SOLMAN: But let's assume, for the moment, that the president and Congress do manage to somehow cut the deficit in half. Deficit hawks warn that there's still a problem in the wings.
And here it is. The one obvious source of money to invest in America's future is what American individuals and companies save. But Americans now save far less than we used to.
Back in the 1980s, of every dollar Americans and U.S. firms earned, we saved about 8 cents. That savings was money to invest -- in new companies, for example.
Today, though, we save less than 5 cents on the dollar. But at the same time, deficits are now up to almost 5 cents on the dollar.
Uncle Sam is this borrowing exactly as much as we save. And even if the deficit, and thus the borrowing, were cut in half, he'd still be soaking up the equivalent of half our private national savings -- money that, says Ben Friedman, would otherwise be invested to grow the economy.
BEN FRIEDMAN: This is about undermining the economy's ability to do the kind of investing that we need, that any economy needs in order to become more productive over time. This is about how much can we do in the way of modernizing our factories? How much can we do in the way of providing high-quality and therefore high-paying jobs for more people? And I think, cumulating over time, it makes a difference for the kind of economy and therefore for the kind of society that we have.
PAUL SOLMAN: Okay, so if Uncle Sam borrowed all of U.S. savings, we'd be in trouble.
But there's another source of savings: Foreigners like the Japanese, who've been investing their savings in us for decades -- buying U.S. stocks, real estate, lending to Uncle Sam. Just last year, the Japanese loaned us about 40 percent of the money Uncle Sam borrowed -- roughly 2 of those 5 cents you saw earlier.
But there's a catch. Foreigners can easily lend elsewhere. And there's now talk that Japan and China may cut back on their investing in and lending to the United States.
So, bottom line: U.S. saving is down, U.S. government borrowing is rising, and foreigners could stop making up the difference.
PAUL SOLMAN: All of which sets the stage for what may be the biggest reason deficits matter: The baby boom.
Having been an economic force since it came of age, it's now reaching retirement. Boomers, after paying Social Security and Medicare taxes for decades, will finally start collecting when they hang up their rock 'n' roll shoes. Or, as Alan Greenspan put it to Congress:
ALAN GREENSPAN: My real concern is that when the time comes to start to pay these benefits, we're going to find that we are in very serious fiscal difficulty.
PAUL SOLMAN: Greg Mankiw says the administration is also concerned, but that the fix will come from a combination of economic growth, spending restraint, and the reform of social security.
GREGORY MANKIW: I hope what happens is we get a national consensus around rethinking Social Security, that people look hard at the president's proposals for personal accounts, look hard at the Social Security Commission's report, and move toward a political consensus that we need to move towards a system that is sustainable for future generations.
PAUL SOLMAN: In the end, though, almost every analysis assumes that "sustainable" must mean, at least in part, "lower total benefits." Reforms may be perfectly reasonable. If we're living longer and retiring later, why shouldn't our benefits be delayed?
But will the baby boom stand for that? Recall the image of Dan Rostenkowski back in 1989, when the Democratic chairman of the House Ways and Means Committee seemed to support entitlement cutbacks for the elderly.
As the baby boom reaches such maturity, its power at the polls may make car-rattling unnecessary. But untrimmed boomer benefits will have to come from those still working. That implies a richer economy, which can afford more taxes and borrowing. But the road to a richer economy tomorrow is more investment today. And that's what big deficits and a growing debt threaten.
SPOKESMAN, TV ad: But no one is willing to make the sacrifices.
PAUL SOLMAN: Back in 1986, the Grace Commission, appointed by President Reagan to improve American competitiveness, also made a TV ad. It imagined America if deficits just kept growing, just kept adding up to a bigger and bigger cumulative national debt.
SPOKESPERSON, TV ad: $2 trillion. Didn't that frighten you?
PAUL SOLMAN: Today, the debt is actually closer to $4 trillion, and more than $7 trillion if you add the government IOU's held by trust funds like Social Security and Medicare.
SPOKESPERSON, TV ad: I have a question.
PAUL SOLMAN: The question is, will continued borrowing starve the U.S. economy of the money it needs to build for the future?
And by 2017, presumably, we'll find out.