Is anyone here interested in truth? Do you recognize it when you see it? Here's some cold hard truth for you.
Where Today's Large Deficits Come From
Economic Downturn, Financial Rescues, and Bush-Era Policies Drive the Numbers
cbpp.org
Some critics charge that the new policies pursued by President Obama and the 111th Congress caused the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years (see Figure 1).
The deficit for fiscal 2009 was $1.4 trillion and, at 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. If current policies are continued without changes, deficits will likely approach those figures in 2010 and remain near $1 trillion a year for the next decade.
The events and policies that have pushed deficits to these high levels in the near term, however, were largely outside the new Administration’s control. If not for the tax cuts enacted during the presidency of George W. Bush that Congress did not pay for, the cost of the wars in Iraq and Afghanistan that were initiated during that period, and the effects of the worst economic slump since the Great Depression (including the cost of steps necessary to combat it), we would not be facing these huge deficits in the near term.
While President Obama inherited a dismal fiscal legacy, that does not diminish his responsibility to propose policies to address our fiscal imbalance and put the weight of his office behind them. Although policymakers should not tighten fiscal policy in the near term while the economy remains fragile, they and the nation at large must come to grips with the nation’s long-term deficit problem. But we should not mistake the causes of our predicament.
Recession Caused Sharp Deterioration in Budget Outlook
Whoever won the presidency in 2008 was going to face a grim fiscal situation, a fact already well known as the presidential campaign got underway. The Congressional Budget Office (CBO) presented a sobering outlook in its 2008 summer update,[1] and during the autumn, the news got relentlessly worse. Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that became embroiled in the housing meltdown, failed in early September; two big financial firms — AIG and Lehman Brothers — collapsed soon thereafter; and others teetered. In December 2008, the National Bureau of Economic Research confirmed that the nation was in recession and pegged the starting date as December 2007. By the time CBO issued its new projections on January 7, 2009 — two weeks before Inauguration Day — it had already put the 2009 deficit at well over $1 trillion.[2]
The recession battered the budget, driving down tax revenues and swelling outlays for unemployment insurance, food stamps, and other safety-net programs.[3] Using CBO’s August 2008 projections as a benchmark, we calculate that the changed economic outlook accounts for over $400 billion of the deficit each year in 2009 through 2011 and slightly smaller amounts in subsequent years. Those effects persist; even in 2018, the deterioration in the economy since the summer of 2008 will account for over $250 billion in added deficits, much of it in the form of additional debt-service costs.
Financial Rescues, Stimulus Add to Deficits in Near Term
The government put Fannie Mae and Freddie Mac into conservatorship in September 2008.[4] In October of that year, the Bush Administration and Congress enacted a rescue package to stabilize the financial system by creating the Troubled Assets Relief Program (TARP). Together, TARP and the GSEs accounted for $245 billion (including extra debt-service costs) of fiscal 2009’s record deficit. Their contribution then fades quickly (see Figure 1).
In February 2009, the new Obama Administration and Congress enacted a major package — the American Recovery and Reinvestment Act (ARRA) — to arrest the economy’s plunge. Mainstream economists overwhelmingly argued that, to combat the recession, the federal government should loosen its purse strings temporarily to spur demand, with a mix of assistance to the unemployed, aid to strapped state and local governments, tax cuts, spending on infrastructure, and other measures. By design, this package added to the deficit. In the fall of 2009, policymakers enacted several smaller measures to spur recovery and aid the unemployed. By our reckoning, the combination of ARRA and these other measures account for $1.1 trillion in deficits over the 2009-2019 period (including the associated debt service). Their effects are highly concentrated in 2009 through 2011 and fade thereafter, delivering a boost to the economy during its most vulnerable period.[5]
Bush Tax Cuts, War Costs Do Lasting Harm to Budget Outlook
Some commentators blame recent legislation — the stimulus bill and the financial rescues — for today’s record deficits. Yet those costs pale next to other policies enacted since 2001 that have swollen the deficit. Those other policies may be less conspicuous now, because many were enacted years ago and they have long since been absorbed into CBO’s and other organizations’ budget projections.
Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs. [6] (The prescription drug benefit enacted in 2003 accounts for further substantial increases in deficits and debt, which we are unable to quantify due to data limitations.) These impacts easily dwarf the stimulus and financial rescues. Furthermore, unlike those temporary costs, these inherited policies (especially the tax cuts and the drug benefit) do not fade away as the economy recovers (see Figure 1).
Without the economic downturn and the fiscal policies of the previous Administration, the budget would be roughly in balance over the next decade. That would have put the nation on a much sounder footing to address the demographic challenges and the cost pressures in health care that darken the long-run fiscal outlook.[7]
The Effect of President Obama’s Budget
The key question is: where do we go from here? President Obama’s 2011 budget proposes to reduce anticipated deficits over the next ten years, chiefly by letting the Bush tax cuts expire on schedule for high-income taxpayers, closing certain tax loopholes and reforming the international tax system, keeping estate taxes at their 2009 parameters, enacting health care reform along the lines of the Senate- and House-passed bills, and freezing (in aggregate) most appropriations for non-security domestic programs for the next three years. The President also backs another round of temporary recovery measures that would boost the deficit in 2010 through 2012, a proposal that is appropriate in size and well targeted. [8]
According to the Administration’s own estimates, its budget would reduce deficits by $2.1 trillion over the 2011-2019 period — or (more appropriately) by $1.2 trillion, when using a baseline that (like CBPP’s) assumes a gradual phasedown of operations in Iraq and Afghanistan and does not count future reductions in costs there as lowering the deficit. (See Figure 2.) The Congressional Budget Office and the Joint Committee on Taxation are currently sifting through President Obama’s budget proposals, and we await the results of that analysis. Although the Administration and CBO figures will certainly not match exactly — for a variety of economic, technical, and conceptual reasons — it is clear that, using a reasonable benchmark, the President’s budget proposals would reduce future deficits by a significant amount.[9]
Like most fiscal analysts, we believe that the Administration and Congress will need to take considerably larger steps. The President himself acknowledges that his proposals do not fully put the budget on a sustainable footing and is establishing a bipartisan fiscal commission to recommend more substantial deficit reductions. First and foremost, policymakers will need to restrain the growth of health care costs — especially as we gain more knowledge of how to accomplish that. Among other steps, they also will need to consider the extent to which additional revenues should contribute to deficit reduction. |
