How the Deficit Got This Big

[웃 910]

How the Deficit Got This Big

By TERESA TRITCH

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.

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.

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.

GRAPH ONE (LOL, look at the Bush projections compared to reality, what an embarrassment!):

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GRAPH TWO:

http://www.nytimes.com/2011/07/24/opinion/sunday/24sun4.html?_r=3&partner=rssnyt&emc=rss

[Obama 2012 1,714]

you're starting to sound like Steven.....

Actually, you're sounding more ignorant than ever on how tax revenue works. So is the author.

Again, I'll repeat: You CANNOT control tax revenue, you can only control SPENDING.

Had we not gone to war in Iraq/Afghanistan, and still had the Bush Tax cuts, we'd still have a budget surplus out the #######.

Revenues INCREASED during the Bush years up until the economy starting falling down thanks to the banking/insurance markets.

It's so hilarious these morons who write this #######. They were all excited in 2004-2006 when people were happy, economy looked great, everyone was buying homes, many were flipping homes, etc. Sure we were pissed at the war, but most people at home had a job, etc.. all was fine and dandy... Then the economy collapses. Tax revenues stop flowing in, and all of a sudden it must be "OMG teh Bush tax cuts caused this" all the while the morons forgot about the abundance of spending that happened from 2001-2007.

It has been and always will be the SPENDING.

[웃 910]

What about the president's claims? Take his pledge that the cuts would spur job growth. To be fair, we'll ignore employment changes during 2008, the year the Great Recession seized the economy. During the 2001 to 2007 business cycle, America's economy enjoyed 52 straight months of job growth. But it was sluggish—in fact, the slowest rate of jobs growth on record since World War II, and just one-fifth the pace of the 1990s.

Then there's wealth. Put simply, the aughts were a decade of income stagnation: The tax cuts failed to bolster most taxpayers' earnings, even before the recession hit. Median real wages actually dropped from 2003 to 2007. Household income from business-cycle peak to business-cycle peak declined for the first time since tracking started in 1967. As documented by my colleague Timothy Noah in his series "The United States of Inequality," this did not hold true for the nation's billionaires and millionaires. Garden-variety high-wage earners saw their income go up. And incomes for the top 1 percent skyrocketed. For some people, obviously, the cuts "generated new wealth," in the president's phrase. But overall, inequality got worse.That leads to the third metric: Did the cuts "open new opportunities"? It's a vague phrase, but one way to measure it is to look at job growth—and there's nothing to see there. Another way would be to say that the cuts benefited "job creators" (to use the current en vogue phrase), like the nation's start-up businesses. But the number of private-sector jobs created by young companies fell during the Bush administration.

Unfortunately, the tax cuts never translated into robust economic growth, either. Indeed, the aughts saw the worst growth since World War II. From 2001 to 2007, annual GDP growth averaged just 2.4 percent per year, lower than in any other postwar business cycle. The contrast is starker still when judging against the previous decade. In real terms, GDP grew half as much from 2001 to 2010 as from 1991 to 2000.

There is another metric that Bush set out for the tax cuts: Did they succeed in helping to create a smaller government? Again, the answer is no. Events beyond Bush's control necessitated the Afghanistan war. He later decided to invade Iraq, and pushed through unpaid-for domestic expansions of government, like Medicare Part D. Deficits and government spending as a share of GDP grew during the Bush administration.

OK, a final attempt at celebration. Did the tax cuts stimulate the flagging economy in the early aughts? Sort of. Tax cuts give a mild boost to the economy, but not a big one. "After the tax rebates in 2001, 2003, and 2008, households [spent] between 25 and 67 cents more for each dollar of tax cut," William Gale of the Tax Policy Center writes. That makes tax cuts "a relatively weak way to help the economy compared to increases in government purchases, for which each dollar of increased deficit turns into an additional dollar of spending."

So, to recap: The Bush tax cuts were followed by low GDP growth, negative median wage growth, and little job growth. Even before the Great Recession, growth in the Bush business cycle was the weakest since World War II. And the cuts cost about $2.6 trillion between 2001 and 2010, according to the Economic Policy Institute—adding to a debt future generations of taxpayers will pay for, plus interest.

By Bush's own metrics, then, the tax cuts were a failure. But perhaps that is because Bush chose such absurd metrics and made such silly promises about tax cuts' economic omnipotence in the first place. To state the obvious, tax cuts are not magic. They can help a strong economy get stronger or help a weak economy pick up some steam. They also have a direct impact on the government budget. But they cannot goose employers into adding millions of jobs, pay for themselves, and arrest the growth of government, all while delivering everyone cupcakes. So perhaps the best we can say about the Bush tax cuts is that they did exactly what we should have expected them to do.

http://www.slate.com/id/2296578/

[scandal 951]

Sure Cure for the Debt Problem: Economic Growth

By CATHERINE RAMPELL

Published: July 30, 2011

It seems remarkable now, with all the End Times talk of debt ceilings and default, but it was only 11 years ago that the owners of that electronic totem, the Durst family, simply pulled the plug. The clock, a fixture since 1989, went dark after the federal government ended its 2000 fiscal year with a record $236.4 billion budget surplus.

Today, well — you know. We face the largest budget deficit the nation has ever known: $1.6 trillion, the equivalent of about 11 percent of our economy. And, whatever Washington does, many economists say the situation will grow only worse, particularly as Americans age and Medicare costs spiral higher.

But there is, in theory, a happy solution to our debt troubles. It’s called economic growth. No need to raise taxes or cut programs. Just get the economy growing the way it used to.

Good luck with that. Growth is in short supply these days, as new, dismal numbers underscored on Friday. Revised data showed that the recession took an even bigger bite of the economy than we thought. And economists are sizing up the risks of another recession.

“The basic issue is that the U.S. is on an unsustainable fiscal track,” says Dean Maki, the chief United States economist at Barclays Capital. “From that point, none of the choices are fun.” The most obvious choices, Mr. Maki says, are to reduce spending (ouch), raise taxes (yuck), let inflation run (gasp) or default (thud).

We wouldn’t need any of that if we could restore economic growth. If that happened, Americans would become richer and pay more taxes. Et voilà! — we’d pay down the debt painlessly.

Crazy as that might sound, particularly given Friday’s figures, the possibility isn’t some economic equivalent of that nice big farm where your childhood dog Skip was sent to run free. There are precedents.

Before its economy crashed, Ireland was a star of this sort of debt reduction. In the 1980s, Ireland’s debt dwarfed its economy. Over the next two decades, though, that debt shrank to about a quarter of gross domestic product, largely because the economy went gangbusters.

“Ireland went from being, you know, the emerging market in a European context, to a very dynamic economy,” says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises.

The United States has done the same in the past, too. After World War II, gross federal debt reached 122 percent of G.D.P., the highest ratio on record. But over the next 40 years, it fell to about 33 percent. That wasn’t because some blue-ribbon panel prescribed austerity; it was because the American economy became much, much richer.

The same happened during the prosperous 1990s, which began with deficits and ended with surpluses. Former President Bill Clinton is often credited for that turnabout, as he engineered higher tax rates. But most economists attribute the surplus years primarily to extraordinarily rapid growth.

It would be lovely to repeat that experience today, and send our federal debt off to that farm with Skip.

But the structure of America’s federal spending is different now than it was in, say, the immediate postwar decades. Back then, growth helped to erase the debt. But remember that in the 1950s, the United States didn’t have Medicare. The population was younger, and Americans didn’t live as long.

Given the health spending obligations we face, and the debt overhang we’re already dealing with, growth rates would have to acquire something like Ludicrous Speed, as in the movie “Spaceballs,” to keep up. And, near term, even modest speed is unlikely.

Usually after a recession, growth snaps back quickly and the economy makes up for ground lost — and then some. That’s not the case this time, at least so far. In the 60 years before the Great Recession, the economy expanded at an average annual rate of 3.5 percent. In the second quarter of this year, it grew at less than half of that pace, putting us further and further behind where we would be if the economy were functioning normally.

These doldrums won’t last forever, but many predict that economic growth to come will be somewhat slower than it was before the recession, for many of the same reasons that our debt is growing so quickly — the aging of the population, for instance.

While it may be difficult or impossible to grow our way out of debt, the G.D.P. figures announced on Friday suggest that we could quite possibly shrink our way into bankruptcy. The austerity measures that Congress is debating would almost certainly slow growth further. That, in turn, might actually worsen the debt problem — the exact opposite of what their proponents suggest.

Economists agree that in the long run, fiscal discipline is good for growth. When the budget is in order, the country isn’t weighed down by the burden of paying down burgeoning entitlements. Companies can worry less about being surprised by, say, higher taxes, and proceed to hire new workers. More manageable federal debt also helps to keep interest rates low, which is generally good for growth. And, again, what’s good for growth is generally good for the debt.

The problem is that reducing spending or raising taxes just now would hurt the already fragile economy. Another recession would not only be painful for ordinary Americans but would actually worsen the debt problem by reducing tax revenue.

Don’t believe it? Consider this: Of the $12.7 trillion in additional federal debt that was accumulated over the last decade, about a third came from the souring economy.

Back in the Great Depression, Washington tightened its belt with disastrous results. Congress severely reduced spending in 1937, plunging the economy back into the hole. Ultimately, that meant even more federal borrowing.

Today, Wall Street is worried that the United States will lose its AAA rating, whatever happens in Washington. Last week’s sign of the apocalypse: While we were moping about the debt mess in Washington, Uruguay — Uruguay! — was putting its fiscal house in order. Standard & Poor’s, which has been threatening to cut the United States’ credit rating, raised its assessment of Uruguay.

Granted, it’s still a junkyard BB+. But it makes you wonder: If Montevideo can gets its act together, why can’t Washington?

In a perfect world, Washington might lay out plans to reduce spending or cut taxes in the future, giving us a collective heads-up, and then phase in those measures a few years from now — when, hopefully, the economy is on a firmer footing.

The problem, of course, is credibility, which the ratings agencies have demanded. Would Washington follow through? Congress has promised fiscal discipline for decades, only to undo its promises before the reckoning. Fiscal discipline is painful, unpopular and, in today’s Washington, as elusive as the prosperity we once had.

William Easterly, a development economist at New York University, notes that countries that undertake fiscal consolidation in the midst of a crisis — like the one Washington is in right now — tend to be penny-wise and pound-foolish.

For example, during the debt crises of the 1980s in Latin America, many countries in that region cut back on easy targets, like telecommunications and transportation. Those decisions later impeded those countries’ ability to function and to collect the tax revenue they needed to keep current with their creditors. Britain likewise axed spending on transportation maintenance and operations in the 1980s, which led to much more expensive repairs to roadways and other infrastructure later.

ON the other hand, the paragon of thoughtful, growth-minded fiscal consolidation is Canada, according to Paolo Mauro, a division chief at the International Monetary Fund and editor of “Chipping Away at Public Debt: Sources of Failure and Keys to Success in Fiscal Adjustment.”

Rather than making decisions under the gun, Canada in 1994 undertook a comprehensive, McKinsey-style review of all of its federal spending over the course of a year to determine “where they were getting value for their money, rather than just doing across-the-board cuts,” Mr. Mauro says.

Policy makers telegraphed their conclusions and medium-term plans for reform, and subsequently pared down Canada’s debt level from one of the highest in the Group of Seven to the lowest. Since Canada cut federal fat judiciously, it reduced its debt without much harm to growth.

American policy makers might learn a thing or two from Canada’s patient, hysteria-free pruning, at least once another clock — the counting down to an American downgrade or default — stops ticking.

Regarding the point about Medicare and the aging of our population (highlighted in the article above), I think there's room to kill 2 birds with one stone. Namely - do something long-term positive for our budgetary situation and economic growth AND implement comprehensive immigration reform. We've always been a nation of immigrants. Consider the First World countries that have stagnant demographic trends of low birthrate, low historic immigration rates, aging populations - e.g. Japan, European countries. We have one potential competitive tool over them: we can grow our working age population by importing it from abroad. It's been happening anyway through illegal immigration in which we weaken our rule of law and have no control over the immigrants that arrive. By consciously changing policy to encourage more legal immigrants who are screened as those most able to contribute to our workforce we'll increase economic demand (they'll need housing, services, etc.), tax revenues (on the earnings of these new Americans), and have a new young generation to fund the benefits of aging retirees. In the 1940s and 1950s we had a Baby Boom as the GIs came home. In the 2010s we ought to import our Baby Boom.

[spookyturtle 9,466]

My theory on the deficit is that more money was spent than was collected. I could be wrong, but that is my stab in the dark answer.

[scandal 951]

My theory on the deficit is that more money was spent than was collected. I could be wrong, but that is my stab in the dark answer.

Did you know that in Australia, they even have better deficits than we do? Much, much better deficits. Australians have better everything.

[mawilson 2,133]

Did you know that in Australia, they even have better deficits than we do? Much, much better deficits. Australians have better everything.

Australia's debt-to-GDP ratio: 20 percent

[Mr. Big Dog 10,747]

Australia's debt-to-GDP ratio: 20 percent

Well, that's better, isn't t?

[mawilson 2,133]

Well, that's better, isn't t?

Definitely.

[Mr. Big Dog 10,747]

Definitely.

Which shows that scandal was spot on - everything in Australia is better. Even the debt.

I suspect, though, that they pay higher taxes in Australia which may just have something to do with their lower debt.

[spookyturtle 9,466]

Which shows that scandal was spot on - everything in Australia is better. Even the debt.

I suspect, though, that they pay higher taxes in Australia which may just have something to do with their lower debt.

But they like to pay higher taxes so that they have to money to invest in infrastructure. They are trying to get the country in tip top shape so that when China takes over they can have something they will be proud of. Australia will be the best conquered country.

[slim 1,533]

Australia will be the best conquered country.

We'll save them again. (At our expense - yet another cost that'll make our deficit even larger.)

[Ste 6]

Revenues INCREASED during the Bush years up until the economy starting falling down thanks to the banking/insurance markets.

Revenues, as a percent of GDP did not really go up during the Bush years. It's not that simple. Check the graph: usgovernmentrevenue.com

At the beginning of the period, they went down, then they recovered a little but it looks like they didn't quite reach a higher level than at the beginning. Then they started to go back down. A net loss in GDP terms.