A decade of spiraling deficits

A decade of spiraling deficits

Last Friday while speaking at the University of Nevada, Las Vegas about the economy, President Obama said:

And these were all the consequence of a decade of misguided economic policies — a decade of stagnant wages, a decade of declining incomes, a decade of spiraling deficits.

I want to focus on that last phrase: a decade of spiraling deficits.

The best way to compare deficits over time is as a share of the economy. This first graph shows budget deficits during President Bush’s tenure. On this graph deficits are positive, so up is bad. The dotted green line shows the average deficit since 1970 for comparison (2.6% of GDP). As always you can click on the graph for a larger version.

This graph does not show “a decade of spiraling deficits.” It instead shows eight years of deficits averaging 2.0 percent of GDP, followed by a horrible ninth year as the markets collapsed and the economy plunged into recession. (Budget wonks who want to understand why I think we should look at nine years for a Presidency rather than eight can read this.) Even 2008’s bigger deficit than 2007 can be mostly explained by a revenue decline as the economy slipped into recession pre-crash. Before the crash of late 2008 President Bush’s budget deficits were 0.6 percentage points smaller than the historic average. Deficits did not “spiral” during the Bush presidency or the decade. They bumped around the historic average, then spiked up in the last year.

Yeah, but what about that horrible 8.3% in 2009 when President Bush left office? That figure is a combination of a severe decline in federal revenues as the economy tanked, plus the projected costs of TARP for fiscal year 2009. If we include that terrible ninth year in the Bush average (as we should), then the average Bush deficit is still only 2.7%, one tenth of a percentage point above the average over the past four decades. (All data are from CBO’s historic tables.)

Yes, that last year sucked. Yes, when President Obama took office he faced an enormous projected budget deficit for his first year in office (which jumped from 8.3% when President Bush left in January to 9.9% at the end of that fiscal year). But it is inaccurate and misleading to characterize the previous decade as “a decade of spiraling deficits.”

Am I making too big a deal out of one phrase? I don’t think so, because President Obama’s economic and political argument centers on redefining the entire Bush tenure as an economic failure. There is therefore a big difference between “a decade of failure” and “seven years-of-pretty-good, followed a disaster in year eight.”

One could argue that the last year was a result of policies built up during the prior seven years, but that’s a different argument about financial sector policies. Instead the President and his allies are claiming that the President’s policies resulted in “a decade of spiraling deficits.” That is obviously false.

Now let us look at the decade we are now beginning. The blue line shows CBO’s estimate of projected budget deficits if President Obama’s latest budget is enacted as proposed. Numbers are once again from CBO.

Which exactly is the decade of spiraling deficits? The last one, or the one we’re beginning now?

For comparison:

  • Bush average: 2.7% (including the 8.3% for FY 2009 when President Bush left office in January);
  • Obama average (projected for two terms spanning nine fiscal years): 6.35%

If you’re disturbed by looking at nine budget years for an eight year Presidency, I wrote this to explain why I think it makes sense.

This graph shows a sharp projected decline as we recover from the crash/recession followed by a steady upward climb. If President Obama’s budget is enacted as proposed, his smallest budget deficit will be bigger than the largest pre-crash Bush deficit.

Let’s look at it another way. Let’s focus only on a hypothetical second term for President Obama, when the effects of the 2008 crash and 2009 recession are far behind us. A second Obama term would span five budget years: FY 2013 through FY 2017. CBO says the budget deficit would average 4.5% in that second term. That’s almost two percentage points above the historic average, 1.8 points above the Bush full-term average including the crash year, and one point higher than the highest pre-crash Bush deficit.

The steady deficit climb under the Obama budget that begins in 2014 looks like it fits the description “spiraling deficits” for at least the last seven years of this decade.

President Obama is incorrect when he labels the last decade as one of “spiraling deficits.” The Bush presidency was characterized by eight years of deficits with no long-term upward trend and which averaged significantly less than the historic average, followed by a financial crash and a year of severe recession and a consequently large deficit.

If the President is right when he says that “a decade of spiraling deficits” are “the consequence of a decade of misguided economic policies,” he is looking at the wrong decade. I don’t see how he can justify his own budget.

58 responses

  1. Pingback: Tweets that mention A decade of spiraling deficits | KeithHennessey.com -- Topsy.com

  2. It would be impossible to have a spiraling deficit with the way you have graphed it. Unless someone invents a time machine.

  3. Ok, lets assume the deficits in 2010 and 2011 are unavoidable but after that the future deficits are a result of 1) the child care tax credit, 2) the effective negative income tax, 3) rising interest rates on debt rollovers and new deficit financing 4) use of general revenues or new deficit financing for medicare and social security from negative demographic trends 5) Obama permanent spending increases, 6) expanded Medicaid and 7) new spending from Obamacare. The net interest line item is what is really driving this and is part of a deadly feedback loop that effects all other spending decisions both discretionary and mandatory. How do you stop a feedback loop? In certain auto immune responses doctors prescribe anti-inflammatory drugs to break the feedback loop. The fiscal drug of choice for Democrats is higher taxes. Don't you think that the framing of the deficit problem is just cover for that fiscal solution?

  4. Pingback: When You Assume Budget Projections Are Reality… « Lobster Stuffed With Tacos

  5. so remind me, is there a diffence in the way the cost of the wars are accounted between Bush and Obama? As I recall, sometimes they are excluded from Bush and included in Obama. If so that could spin the facts a bit.

    • Mike has the audacity to use the word "spin!" So the CBO purposely excludes Bush's war numbers and adds Obama's?

      • not to mention, just as an example, the entire bailout to the GSE's (and ever growing) has been left off of Obama's books as well.

  6. The link to the CBO numbers (regarding the Obama budget) seems to be to the January 2009 CBO projection. This is a bit outdated. Isn't the latest projection from June 30, 2010?

  7. The simple fact is that the Bush decade went from projected (and real) surpluses, which Bush promised would continue, to a doubling of the national debt to 11 trillion dollars, culminating in the economic crash that created that big deficit spike. You could argue that it was due to circumstances beyond his control, which is an even weaker argument than the semantic quibble put forward here, but you can't argue that it didn't happen. Going forward, if we could hold health care costs to the rate of inflation, then the projected deficit growth in the out years goes away. Indeed, the Democrats have passed legislation to do that without a single Republican vote. Will it work? Who knows. It is rather weak tea. But the CBO does not attempt to project such savings.

    • You make a claim you cannot support because the legislation Democrats passed does no such thing. From the day after they passed it, the CBO has consistently revised upward the numbers showing that the legislation doesn't control healthcare costs, isn't deficit neutral, and is completely based on fraudulent claims by the Democrats.

      Doc fix? They just pretended it didn't exist. Keep your health insurance? Oh yeah..about that…never mind. Increased costs for the IRS? Huh? Really? And let's not even go into how the disastrous response to the BP oil spill shows just how incompetent the government is when push comes to shove.

      Lies, lies and more lies….and to be perfectly frank, your comment is just more of the same.

    • The "simple fact" is that what Obama said is not true. Bluster all you want. You're making a different argument. It may or may not be true, but your "simple fact" is obfuscation.

    • " to a doubling of the national debt to 11 trillion dollars, culminating in the economic crash"

      Post hoc ergo propter hoc, eh?

      And if you believe that increasing the national debt leads to catastrophe, then how can you defend Obama's having added more to the debt in 18 months than Bush did in 8 years, including the Pe4losi Congress?

      Ah, you're claiming the Obama deeficits are "necessary". Necessary for what? Misguided Keynesian stimulus idiocy? Never worked, never will.

  8. Keith,

    Good points all, and your argument for 9 years is sound. But you omitted the greatest flaw in Obama's critique of the Bush deficits. Obama saw the deficit exploding and — embraced the madness. He boosted spending further (and continues to try to do so) while passing another round of ineffectual tax cuts. Complaining about the deficits as Obama does, and then making them even larger is classic Obama.

    • JD Foster,
      I don't know where you studied economics, but one thing you never do is slash federal spending during a time of recession/depression — which 2008-09 was. The first Great Depression taught us that dept-financed government stimulus is what pulled us from the mire, and before you say, "WWII pulled us out of the Depression," what do you think that was if not debt-financed government stimulus? Supporting Obama's economic policy with regard to recession/depression stimulus, I'd add that every country affected by the financial meltdown/recession has embarked on a major stimulus package from the government. Republicans are playing their famous role of good-politics-bad-policy, but several independent economic forecasters, including the CBO has estimated that the stimulus has created or saved between 2-3.5 million jobs and prevented what would have been a much more serious downturn. Healthcare reform (unlike Bush tax cuts) are paid for and actually significantly reduce the deficit in out years. Nobody argues that the deficit spending must be brought under control, but our first concern has to be to get the economy growing and creating jobs again.

  9. Keith, some great points but a couple of quibbles:

    (1) We get to see projected budgets under Obama era law (I'll believe the drop in deficit will happen when it's actually happening; I have no reason to believe it will presently), but not under Bush era law. For instance, what's the long-term cost of Medicare Part D look like? How much does that play into Obama's deficits? I understand that it has to be Obama's for fair attribution, it IS happening during his administration, but it seems disingenuous, and Bush's image benefits from this highly underhanded behavior.

    (2) Out of curiosity, where do all these magical deficit reductions come from in the Obama budget? Some share are the estate tax, some share are the Warren Buffett Tax Relief Program… is there more?

    (3) Something just looks wrong. I don't see how we could lose a multi-$Trillion surplus under Bush while running a 2% deficit; what could I be missing?

    Some very good points, and some very nice graphs. Thanks!

    • We didn't "lose" a multi-trillion surplus under Bush. That figure was a 10-year projection if nothing changed. How often has there been a 10-year projection that was accurate?? Nevertheless, there was change. During the 2000 campaign, Bush regular stated that the economy was contracting…which indeed it did (recession beginning a mere 6 weeks into his first term….hardly a result of his policies at the time). Then there was the economic hit of 9-11, and the cost of war that was overwhelming approved by a bipartisan Congress. The situation changed….so that 10-year, multi-trillion-surplus-that-never-really-was changed, too. (Look at the Treasury numbers for the actual debt-levels year-on-year, and you'll see there never really was a surplus to begin with anyway, otherwise, the debt wouldn't have kept growing. Financial accounting in the government is a nebulous thing!!). The bottom line is, that as a percentage of the economy, after the immediate effects of the beginning recession and 9-11, the deficits under Bush were diminishing until the year of the market crash. Which goes back to Keith's premise that the Bush years were hardly a decade of spiraling deficits.

  10. Pingback: Bush’s deficits vs. Obama’s deficits, in one graph | Kyle Wingfield

  11. The assumption that historical average is the appropriate measure makes some sense, but for the purposes of this article it covers up the fact that Bush increased the annual deficit by 4.6% almost twice the historical average. Plus this article does not mention the doubling of the debt which drives the Obama deficits due to increased debt payments.

    • WOW! Talk about living in denial of reality. The Obama deficits are due to increased debt payments?

      Yeah…And you've got a bridge you'd like to sell too, I'm sure. The Obama deficits are entirely due to increased government spending since the Democrats took over Congress in 2007. If we returned federal spending to the levels that existed the year before they took control, the deficits practically disappear.

      You're going to have to go back to the office and get new talking points from Dear Leader because those just aren't going to work in the real world.

      • I didn't say that the debt payments were the total deficit but they are a built in expense caused by the Bush reckless, irresponsible, unpaid for spending (e.g. unpaid for Medicaid Part D, Unpaid for tax cuts, unpaid for war) on and on.

        You made no comment about the doubling of the debt, clearly your reality is akin to Alice in Wonderland where up is down and down is up.

  12. If you want to show the coming decade and blame it on Obama, please show what that decade would look like under Bush's policies. My understanding is that primarily due to health care costs and the cost of the Bush tax cuts, deficits would "spiral upward" in this decade regardless. The president's budget, while far (really far) from ideal, is actually an improvement over extending the current policies. CBPP has a couple graphs illustrating this effect here: budget and deficits.

  13. I don't think you should include 2009 as a Bush deficit for a couple of reasons. First congress never approved or passed a budget for 2009 until more a month after Obama was sworn in. It was sustained with continuing resolutions. This was done to prevent an actual 2009 Bush budget. Dems wanted credit for it, the disaster it was. It included a $410 billion discretionary package. The Stimulus package was Obama – Congress all the way, and TARP while initiated by Bush had the second $350 billion approved only at the request of Obama.

    With the passage of ObamaCare we are guaranteed higher deficits, and higher costs for health care. Another Obama debacle.

    There is not much to hang you hat on from this administration.

  14. The problem I see is that you're making this Bush vs Obama. However, the President isn't the only one with an influence on the budget. Congress also has a serious impact. Another explanation of the change in direction that occurred in 2007 is because the Democrats took over Congress and ramped up spending. 2008, 2009, and 2010 belong as much to Congress as they do to whoever was the President.

    • Just Me, you're right. It's depressing to read so many economists that apparently have no idea of how the responsibility for taxation and spending –and therefore for borrowing and debt service– is shared by the President and Congress. I must conclude that my colleagues that ignore this critical institutional fact are partisans with no interest in understanding what is going on.
      Moreover, we should know that we cannot take seriously anything that politicians say and that we should focus on their decisions and actions. "Vuvuzela" Obama may be much more noisy than the typical politician but he's all noise. Even the laws that he has promoted and survived the law-making process are noise in the sense that it will take years to know their consequences, mainly because they are open to very different interpretations and their application will be a lottery. Indeed, the U.S. economy is suffering from too much noise.

    • Yes, I was inclined to make the exact same point. I live in Nevada where as everyone knows Harry Reid is up for re-election. One point that should be emphasized at every opportunity by Sharron Angle is that Harry Reid is responsible for all of the deficit spending pushed through since he became majority leader in 2007. Technically I think that means starting with the 2008 budget, as I believe the 2007 budget was approved at some point during 2006 before the election.

  15. MD

    3) this is because Clinton's surpluses were "projected" which like the deficit reductions in the graph above means "largely wishful thinking." There was no actual surplus cash on hand. It was a pie-in-the-sky "if the internet bubble never burst, if the bull market continued, if Murphy's law doesn't strike". Too many of these "ifs" went wrong and then we got hit with 9/11 which did have economic consequences, too. Very little of it had anything to do with the president — who at any rate doesn't set economic policy — but it was a convenient stick to beat Bush, I guess.

  16. I think Just Me is on the right track, but I would go even further. I have never understood the propensity to attribute economic success or failure to Presidential administrations. The President has, at best, only indirect influence on the budget and, of course, veto power (for what it's worth). Congress has the purse strings by design so plots of this type should rightfully be plotted against control of Congress.

  17. This Obama v. Bush diatribe is nonsense. With respect to Bush, despite starting the decade at the crest of an employment cycle, the dot.com bubble bursting, the 2000 election uncertainty, 9/11, the Enron / World-Com debacles, 2 wars and many unprecedented natural disasters; employment grew throughout the decade. It was only when congress was seated in 2007 and began it's war on energy; followed by the rise of Obama in the polls did the business world start to ease back on the throttle and slow growth in anticipation of things to come.

  18. Obama ran around during his election promising to bankrupt the coal industry, rewrite NAFTA, pass cap and trade, and create a liberal's wet dream of social-policy and regulation on the backs of the employers. The people with something to lose were listening. The employers saw every new employee under the Obama/Pelosi/Reid vision as an increasing liability, not an asset, so thus began the decline in employment and the markets; first through fearful attrition… then through reasoned lay-offs.

  19. When he was elected there was another big fall; and subsequent to that employment has fallen even more as he has illustrated to America and the world that he actually believes all that ridiculous populist campaign rhetoric and is acting upon it.

    We have survived as well as we have only to the degree that his 'progress' has been hindered. He has substantially harmed just the people he was purported to help. Turns out big business is not the working man’s enemy– big government is – in promise and in practice.

  20. JimmyN has it right … what you would have expected businesses to do, once they saw that their future was to be cash cows, social-services surrogates, and scapegoats for the class envy that drives Progressive wealth redistribution … a future that has come/is coming true in this Administration?

    That anticipation, IMO, may have been the trigger in 2007 for the entire downward slide since.

    What Progressives do not understand is that corporate "greed" is not the problem … it is the combination of the greedy colluding with other greedy within the government … and the policies of the Progressives expand the opportunities for such collusion even as they limit the ability of individuals to work around it.

    Of course, one must also understand that greed is not exclusive to those whose publicly-stated intention is to make a profit …

    … when a scientist "interprets" his findings in ways that appeal to those in control of grant money who happen to have a political agenda, that is greed.
    … when a professor toes the dominant Party Line of his/her colleagues in order to grease the skids for tenure, that is greed.
    … when an activist distorts the facts-on-the-ground to increase contributions, that is greed.

    Progressives, your leaders are, what you decry.

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