Whose Deficits?

I have tended not to involve myself in the finger-pointing over the budget deficit, finding myself more inclined to look forward at the policy changes that will be needed to right our listing fiscal ship of state than to look backward and try to assign blame. Simply stated, I think that trying to take either credit or blame for the policies that brought us to where we are now is an enormous over-simplification.

At the left is a graphic snapshot from the Center for on Budget and Policy Priorities, a progressive think-tank, taken in December of 2009 of the budget deficit and its projected expansion into the future. You can click on it for a larger image. Although the story it tells is one of the “Bush era taxcuts” taking an ever-growing toll on the deficit, I suspect that, were the snapshot taken based on President Obama’s proposed 2011 budget, it would look somewhat different.

However, that’s not my point. My point is that I see no coherent way to gain partisan political advantage from the argument. President Obama has produced deficits higher than any in the post-war period however you measure them by responding to the economic situation in which he found himself, the product of the actions of the Congress and his predecessors, Republicans and Democrats alike, in the way that he thought was best and as his advisors counselled him, in embarking on a large fiscal stimulus via spending, the complex of grants enacted last spring and referred to as “the stimulus package”, now known to amount to something over $800 billion.

That was precisely the fix in which President Bush found himself at the start of his presidency. The economy was in recession as a consequence of events and actions that took place before he assumed office. Previous policies put in place and the state of discourse left few alternatives.

He had to do something. That was assured by his father’s loss in 1992. The historically extremely mild 1990-1991 recession was exploited to good effect by the Clinton campaign. It’s the economy, stupid! President George H. W. Bush’s assertion that it’s the business cycle, stupid (or words to that effect), lost him the election.

The alternatives were to embark on an ambitious spending program as President Obama has done or to cut taxes. There’s some empirical evidence (including that produced by Obama economic advisor Christine Romer) that suggests that tax cuts are more effective than spending for economic stimulus (i.e. the multiplier is higher). I, for one, would like to see stronger empirical evidence one way or the other.

The present structure of taxes and state of political discourse ensures that any tax cut will be a tax cut for the rich. The tax that falls on people in the lower two income quintiles most heavily is the payroll tax or FICA. Any cut in FICA reduces the revenue for the Social Security trust fund and that’s invariably pilloried as a frontal assault on Social Security. Cutting business income taxes is lambasted as being in the pockets of the evil corporations.

Willy-nilly presidents must do something and for President George W. Bush “something” was tax cuts. For President Obama it’s spending. Each has selected the solution with the least political pain (for him) and the most political gain (for him) under comparable circumstances and the result is a country lurching towards insolvency.

So, the answer to the question posed by the title is that they are our deficits and we need to muster the wits and will to deal with them. I am not optimistic.

9 comments… add one
  • Willy-nilly presidents must do something and for President George W. Bush “something” was tax cuts. For President Obama it’s spending. Each has selected the solution with the least political pain (for him) and the most political gain (for him) under comparable circumstances and the result is a country lurching towards insolvency.

    You heretic! You evil man! How dare you suggest that our [insert political party here] is not the right way for the country to go!

    Burn him! Burn the witch!

    All kidding aside I think your above paragraph is right on the money. Neither party can get us out of this. All the arguing that Obama or whomever the Republican candidate will be in year or so will get us out is just a whole bunch of nonsense. My feeling is that each party is not really all that much different when you get down to things like fiscal policy. They’ve both led us down the primrose path to ruin, IMO. The Republicans are no longer a party of fiscal responsibility and small government. And the Democrats have to stay ahead of them on the goodies they give out. Its like an insane fiscal arms race.

    But arguing over stupid party proclimations….probably what the dodoes were doing in their final days.

  • PD Shaw Link

    I found that chart to be strange and rather partisan.

    First, it assumes that the costs of the wars in Afghanistan and Iraq are virtually unchanged from 2009 to 2019. Without looking at the referenced CBO report, I must assume that they just looked at the approved spending and projected it forward. I can’t imagine we’ll be spending the same in ten years, let alone that someone would argue by extension that ten years was Bush’s decision.

    Second, and in contrast to how I believe the wars were estimated, the chart assumes that Obama and the Congress will pass the Bush tax cuts set to expire. Wow, the influence that man must have on current office-holders that they have no other choice available is incredible!

    Third, the Bush tax cuts include the periodic AMT relief being continued. Since I’ve always understood the AMT as a Democratic constituency concern, the attribution is suspect, but like the other taxes, the AMT relief need not be extended. (Q: Is continuing to index AMT largely responsible for the increasing impact of the so-called Bush tax cuts?)

    All of these items look like co-owned defects, with the exception of the economic downturn and this particular stimulus. But what’s odd to my eye is that the economic downturn numbers remain largely unchanged through 2019 even with the substantial stimulus. Does this chart assume an L-shaped recovery and no economic impact from the stimulus?

  • Third, the Bush tax cuts include the periodic AMT relief being continued. Since I’ve always understood the AMT as a Democratic constituency concern, the attribution is suspect, but like the other taxes, the AMT relief need not be extended. (Q: Is continuing to index AMT largely responsible for the increasing impact of the so-called Bush tax cuts?)

    Yes and its a really, really rotten idea in that the increases in tax revenues is due to nothing but inflation. If we doubled people’s incomes by doubling the money supply then even more people would be hit with the AMT even though in real terms they are no better off.

    It is one thing I think the Obama Administration should push for fixing, even permanently. That would be a good policy move, IMO and one I’d fully support. Fix the AMT tax and index that sucker to inflation and be done with it.

    All of these items look like co-owned defects, with the exception of the economic downturn and this particular stimulus. But what’s odd to my eye is that the economic downturn numbers remain largely unchanged through 2019 even with the substantial stimulus. Does this chart assume an L-shaped recovery and no economic impact from the stimulus?

    Good point and question.

  • Eric Rall Link

    Eyeballing the graph, it looks like CBPP believe the current economic downturn and the wars in Iraq and Afghanistan will have a uniform effect on the deficit over the coming decade. This strikes me as counterintiutive, and I wonder how the came up with it.

  • Eric,

    That is the ‘L-shaped’ recession that PD referred to. Using economic jargon it could be called a unit root problem. That is the economy sufferes a permanent loss in output. The other option is where we have ‘V-shaped’ recession where the downturn is followed by robust growth/job growth. Frankly, I’m not seeing that.

    No, given an L-shaped recession and holding all other aspects of constant yeah, you’d expect a “permanent deficit” due to the recession. Of course, all other things are not constant, so it is a bit dubious as far as assumptions go.

  • I honestly don’t see how anybody can talk about a V-shaped recession with a straight face any more. How long has the recession gone on at this point? Nine quarters? Something like that.

    Last quarter’s growth (outside of inventory correction) was sufficiently phlegmatic that it still counts as slow or no growth. I’m guessing we’ll see a correction forthcoming in a month or so that reduces the growth even more. And that tomorrow’s employment report will show further declines if anything.

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