Friday, December 30, 2011

How did the US federal deficit get so big? (#1)

At the end of the 1990s—i.e., at the end of the Clinton administration—the US government was running a surplus. Since 2001, the federal government has been running large and increasing annual deficits. So what produced these deficits? Where do they come from?

The basic answer is pretty simple. The two major causes responsible for size of the current federal deficit are:
(1) fiscally irresponsible policies of the Bush II administration, including the Bush tax cuts, two wars that weren't paid for, and a poorly designed expansion of Medicare that wasn't paid for; and
(2) the direct and indirect effects of the economic crash that began in 2007-2008.
That second category includes reduced federal tax revenues, the cost of various compensatory programs that are supposed to kick in more or less automatically (e.g., increased unemployment payments), and policy initiatives undertaken by the Obama administration to counteract the recession.

Actually, if we leave out the direct and indirect consequences of the economic crash, a surprisingly large proportion of the present and projected federal deficit can be attributed to just one cause: the Bush tax cuts. As Ross Perot used to say (memorably, if not always accurately), it's that simple.

The wars in Afghanistan and Iraq obviously cost a lot too, and their impact on the deficit was increased by the historically unprecedented decision to wage two major wars while reducing taxes for the wealthy. But the costs of those wars are presumably winding down, while the Bush tax cuts remain.

According to right-wing propaganda, "out-of-control spending" by the Obama administration is to blame. So how much has additional spending by the Obama administration, including the 2009 economic "stimulus" (the American Recovery and Reinvestment Act), contributed to the mushrooming deficits?

By comparison with the other factors, a fairly small amount. And even there one has to add two caveats. First, a lot of that additional spending really falls in category #2 above—i.e., the cost of policies undertaken to counteract the recession and to prevent it from turning into a full-scale depression. (To be fair, this caveat also applies to some of the Bush administration spending in 2008, including the TARP and the 2008 economic "stimulus".) Second, most of the new Obama-era spending is temporary, whereas the consequences of some of the Bush II policies, especially the tax cuts, are "structural" in the sense that they can be expected to continue into the indefinite future (unless the underlying policies are fixed).

=> These are all fairly obvious and undeniable facts. But a depressingly large proportion of current public discussion and political propaganda tends to ignore, obfuscate, distort, or deny them. So some reality checks would be useful

One good reality check on this subject is provided by the excellent New York Times piece below, from July 2011. I've also reproduced one of the two graphs that accompanied this article. (That graph, by the way, does not include the direct effects of the economic crash. But even without them, the comparison it presents is pretty clear.)

Some implications:
A few lessons can be drawn from the numbers. First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. [....] Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.
Read the whole thing. It's brief and cogent.

—Jeff Weintraub

P.S. For two more, complementary, reality checks see: Where did the US federal deficit come from? (#2) and Where did the US federal deficit come from? (#3) – Bruce Bartlett on the fiscal consequences of the Bush II administration.

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New York Times
July 23, 2011
EDITORIAL/DECONSTRUCTION
How the Deficit Got This Big

By Teresa Trich

With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here — from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions.

Despite what antigovernment conservatives say, non-defense discretionary spending on areas like foreign aid, education and food safety was not a driving factor in creating the deficits. In fact, such spending, accounting for only 15 percent of the budget, has been basically flat as a share of the economy for decades. Cutting it simply will not fill the deficit hole.

The first graph shows the difference between budget projections and budget reality. In 2001, President George W. Bush inherited a surplus, with projections by the Congressional Budget Office for ever-increasing surpluses, assuming continuation of the good economy and President Bill Clinton’s policies. But every year starting in 2002, the budget fell into deficit. In January 2009, just before President Obama took office, the budget office projected a $1.2 trillion deficit for 2009 and deficits in subsequent years, based on continuing Mr. Bush’s policies and the effects of recession. Mr. Obama’s policies in 2009 and 2010, including the stimulus package, added to the deficits in those years but are largely temporary.

The second graph shows that under Mr. Bush, tax cuts and war spending were the biggest policy drivers of the swing from projected surpluses to deficits from 2002 to 2009. Budget estimates that didn’t foresee the recessions in 2001 and in 2008 and 2009 also contributed to deficits. Mr. Obama’s policies, taken out to 2017, add to deficits, but not by nearly as much.


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A few lessons can be drawn from the numbers. First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. Government has to spur demand and create jobs in a deep downturn, even though doing so worsens the deficit in the short run. Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.

In future decades, when rising health costs with an aging population hit the budget in full force, deficits are projected to be far deeper than they are now. Effective health care reform, and a willingness to pay more taxes, will be the biggest factors in controlling those deficits.

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