Rising Deficits -- Don't Blame the Economy

The first rule of holes is this: If you're in one, stop digging. New government estimates released last week show that the federal government will be in a big hole in fiscal 2009: a $546 billion deficit. They also help show how we got into this hole -- and the answer may surprise you.

In January 2001, the month President Bush took office, the Congressional Budget Office released budget estimates for each of the next ten years (2002-2011). CBO predicted that the 2009 budget would show a $710 billion surplus. So the $546 billion deficit now predicted for 2009 is actually $1.3 trillion worse than CBO predicted nearly eight years ago. What caused this trillion-dollar decline?

Some people point to the economy. CBO's 2001 projections came out before the 2001 recession and the 9/11 attacks, which further slowed the economy. A weaker economy means less tax revenue, which in turn means smaller surpluses or bigger deficits. Since the 2001 projections couldn't factor these events in, it's not surprising that they proved too optimistic.

But, in fact, the economy's weaker-than-expected performance, along with other "technical" factors that are beyond policymakers' control, account for less than a fourth of the $1.3 trillion deterioration in the budget. The other three-fourths -- $1 trillion's worth -- is due to actions by the White House and Congress since 2001 -- specifically, the tax cuts and spending increases they enacted.

Put another way, even though the economy has performed less well since 2001 than CBO expected, the federal budget would still be running a projected $465 billion surplus in 2009 if policymakers had enacted no tax cuts or program increases.

Does this mean increased domestic spending is mostly to blame? That's a common claim by those seeking to shrink domestic programs, but the numbers don't support it.

It's true that Congress has expanded several entitlement programs since 2001 -- most notably by adding prescription drug coverage to Medicare. Yet these cost increases amount to only 12 percent of the $1 trillion deterioration.

And funding increases for domestic "discretionary" programs -- the programs Congress funds each year through the appropriations process, such as education, medical and scientific research, and law enforcement -- account for just 6 percent of the deterioration. Over the past six years, funding for this part of the budget has hardly grown at all in real per-capita terms.

In reality, the two main reasons why the 2009 budget will be so much worse than CBO had predicted are tax cuts and increases in military and other security-related spending.

Tax cuts alone account for 42 percent of the budgetary deterioration for 2009 that stems from policymakers' actions since 2001. Increases in military and other security programs account for another 39 percent. Combined, these two factors account for 82 percent of the budget decline that is due to policy actions.

The tax cuts -- the largest of which by far was the giant 2001 Bush tax cut -- will cost $295 billion in 2009 alone. While nearly all taxpayers will receive some tax cut, the distribution of the tax cut benefits is highly skewed. In 2009, a typical household in the $40,000-to-$50,000 income range will receive a tax cut of about $950; households with incomes over $1 million will receive tax cuts averaging $135,000.

Regarding the military and other security-related increases, it's worth noting that these reflect more than the wars in Iraq and Afghanistan. The underlying budgets of the Defense, State, and Homeland Security Departments have also gone up significantly, for reasons not directly related to operations in Iraq and Afghanistan.

The picture these new CBO figures present -- an enormous deterioration in the budget over the past eight years, caused mostly by tax cuts and security-related spending increases -- is much the same if we look not just at 2009 but at the entire ten-year period that CBO's January 2001 projections cover. In 2001, CBO predicted the federal government would amass surpluses totaling $5.6 trillion over the 2002-2011 period. Now, CBO data show a cumulative deficit of $3.8 trillion over that same period. That's a $9.4 trillion deterioration, $7.2 trillion of which was caused by policy actions. Tax cuts and security-related spending increases caused 83 percent of that.

These facts carry several important messages for the next President and Congress as they try to restore fiscal responsibility, one of which is that domestic discretionary programs shouldn't be made the scapegoat for the emergence of large deficits.

As noted, increases in domestic discretionary programs account for just 6 percent of the budgetary deterioration for 2009 caused by policymakers' actions. Moreover, some of these programs have been cut significantly in recent years (child care funding, for example, has fallen almost 17 percent since 2002, after adjusting for inflation), and some will require additional investments over the next several years to address unmet needs in areas ranging from veterans' health care to job training to the environment.

Another important message is that tax cuts cost money -- and extending all of the 2001 tax cuts past their scheduled expiration in 2010, as many conservatives favor, would cost a lot of money. Consider this: extending the tax cuts just for the top 1 percent of households, a group that today makes more than $450,000 a year, would cost more over the next 75 years than the entire Social Security shortfall.

Thus, one of the most critical domestic policy debates over the next two years will be about which of the tax cuts to extend.

And a critical part of the tax-cut debate will be to ensure that policymakers understand that tax cuts really do cost money. Some people argue, despite clear evidence to the contrary, that tax cuts pay for themselves. If we fall for that claim, we're likely to end up digging the deficit hole even deeper.

Robert Greenstein is Executive Director of the Center on Budget and Policy Priorities.

Comments

[Sundialsvc4]

Yawn...

Chill out, guys. Go get some sleep. It's all right. It's just "money."

No one has to "pay back" anything because "money" exists purely by fiat. The government "determines the value thereof," remember? In other words, it PRINTS it.

Now... small technicality here... accountants insist that "debits must equal credits," so they don't call it "printing money." They call it "borrowing."

We don't need to budget. We don't even need to tax. We only need to print. And that's precisely what the government IS doing. If you are a moderately slow reader, $1 million more "money" now exists than existed when you started reading this reply. By the time you finish, there will be $1 million more.

An insurer runs into trouble and the government magically, instantly comes up with $85 Billion to bail it out. But where did that money come from? It came from nowhere. Will AIG ever, you know, "pay it back?" Don't be silly.

Why, we don't even have to produce! We just print more money and buy whatever we need . . .

Gee, this is all so smart and clever.

[wendynyc]

And he wasn't even elected...

[PADDYWHACK]

Our fearless and gormless leader nhas the Reverse Midas touch,took a perfectly good currency and converted it to garbage,ditto the whole economy.

[MysticInd]

This problem is more complex than you make it. Sure there is budget predictions and when the economy is down yes, those predictions are off. But to say you know why...without going into history is irresponsible.

[KillTheMessenger]

That "we just can't know for sure" is just another lie of those who can't bare the truth.

[WIpatriot]

Are you even surprised at any of the answers, KTM??

[johnsopinion]

Actually, it isn't.

Use your own checking account as the model.
When your balance is low, you can do two things--
increase your income by taking a second job or selling
off some of your assets (household goods, the third car, etc.) .

Or, you can stop the flow of money out of the account
and wait for it to build back up with your weekly paycheck
deposits.
In other words, either increase your income or
decrease your expenses. Period.
That's pretty simple.

The problem is 'creative accounting,' like maybe calling a check an investment
and treating it as an asset which implies that you have more money in your
account than actually exists and then borrow against it .!!!!!!!!

When you're out of money or near zero in your personal checking, do you
rush out and write more checks?
Do you?
How does your bank reward YOU for deficit spending?

[NorCalNative]

Bob, I often read David Frum's diary. I don't agree with much of what he has to say, but I respect his intellectual integrity and his knowledge. Recently, when the Republican V.P. candidate had not yet been chosen, a former senior Bush administration figure wrote to him with a list of 10 reasons why Romney shouldn't be McCain's pick.

The parts about Romney are not important. What he said about business is.

"Business and government require different leadership styles......."

......"In any event, skill in business is very different from skill in finance--or governing."

The budget problems on which this article is based have been brought about by business people with a much too heavy hand in governmental affairs. Fomer captain-of-industry Donald Rumsfeld tried to reform the military and run the illegal invasion of Iraq like a business. Look where his "mean-and-lean" business approach got us.

Republicans as the party of business tend to ruin government, not just because they don't like it, but because they run it like a business. Even conservatives from the Bush administration know it.

[montemalone]

Plus, every business Bush ever ran is defunct, save the Rangers, because he was a minority partner, brought in for "prestige", and he was bought out for beaucoup bucks and sent on his way.

[DuganS1]

There is some deeply flawed analysis here. The idea that the tax cuts resulted in an equal amount of lost tax revenues is not correct. A large portion of those tax cuts simply resulted in increased discretionary income for families that simply spent it right back into the economy increasing economic growth and thus tax revenues. Another portion of the tax cuts were on cap gains and that has resulted in a higher stock market and thus higher tax revenues. Another portion was for the upper class which may have largely been lost, but it must have resulted in increased investment and thus higher economic growth and tax revenues. Using the CBO estimates is just not realistic as they make a lot of assumptions which very often don't turn out to be true. The CBO can't assume wars, financial debacles, worldwide economic conditions, technological innovation, etc to any reasonably accurate degree.

[Thermodynamics]

You just recited the entire trickle-down theory. I think the last 7 years have shown us that it sounds good in theory but it does not work.

Or, in class war terms, the ideas you propose (reduced cap gains, tax breaks for the wealth, etc) benefit the very wealthy but remove money from everyone else.

Also, about deregulation, did the market fix Fannie Mae, Lehman, AIG? No, it took public funds.

You guys tried the experiment and it failed.

[DuganS1]

I don't understand how you think tax breaks for people that actually pay taxes somehow hurts everyone that doesn't pay taxes. Please explain? Many upper income folks provide the liquidity necessary for investment, particularly for small business, which has been largely responsible for job creation over the past two decades. Also, don't forget that George W Bush only reduced the top rate from 39.6% to 35% (in 2003), which is not a big cut (only about $40-50b a year). President Kennedy, in contrast, wanted the top rate cut from 91% to 65%, but congress only lowered it to 70% in the early-mid 60s. Reagan then lowered it from 70% to 50%, where it remained until 1987 when it was cut again from 50% to 28-31% where it remained until 1993. I just don't see how George W's 4.6% cut on the top tax bracket hurt the middle or lower class in any way whatsoever.

[KillTheMessenger]

Nonsense. Repeating it does not make it any more true.

[WIpatriot]

Doogie, thanks for playing!

[Aaror]

Dugan,
The problem is the crowding effect.
When the government runs a deficit to give tax breaks to the rich, the government borrows this money. This reduces the capital available to fund new investments. Meaning the effect on capital availability is ZERO!
All you have done is saddled the government with 200 million dollars a year of interest payments, which will require higher taxes, or more borrowing, which will reduce capital available, which by your logic will reduce our economy and make the government revenues go down.

[DuganS1]

The budget deficits haven't reduced the capital available for new investments. It's actually increased money available because it's put more money into the private sectors hands to invest. Payments on the national debt make up the smallest portion of the national budget than in any year since 1980.

[KillTheMessenger]

And what is new about this? That the military industrial complex would destroy the financial foundations of this nation has been pointed out by any number of analysts for decades. No big deal.

It's not even a novelty. The USSR showed us how that works. We just decided to follow them on their way into the abyss.

[jacqmac]

True-but Obama/Biden would do well to keep stating the deficit etc. in simple analogies. It is truly HARD for even me, to wrap my brain around billions and trillions of dollars. Unless the candidates start talking about how MUCH we are really LOSING by illustrating it with "You know what a BILLION dollars could have bought? And then listing things that EVERYONE, and I'm pretty sure, EVERYONE, can envision-things like schools with teachers, housing units, bridges to SOMEWHERE, roads, etc., everyone's gonna keep on playing the 'blame game'. A couple of sentences could sum up this article in a campaign speech and be an effective tie-in to the McCain=Bush=more of the same.
I mean Joe Biden KNOWS! Obama KNOWS! A few of us voters KNOW! And the danger lies in the 'balanced budget' song that is already being sung by one side. Again-it's up to US who know anything about this at all to keep on pummeling our 'not so sure' neighbors and get them to VOTE and VOTE for the Obama/Biden ticket. I get creative when I do this. It's fun!

[Aaror]

Actually, my favorite way to make it personal is to talk about the cost per person. Saying the US owes 10 trillion means nothing to most people, saying that you, as a US citizen, own $30,000 because of your nation's debt means something. Saying that $20,000 of that $30,000 in debt is because of Bush's war and tax cut, and that McCain backed both, means something.
Hey Americans, McCain supported Bush in policies that cost YOU $20,000. Further proof that he doesn't understand the economy.

[jeanrenoir]

No question that Bush and the Republican Abramoff Congress were entirely responsibel for the deficits which have wrecked the dollar and severely damaged our economy. The American public is finally getting scared enough to focus on cause and effect, instead of being distracted, with their usual stupidity, into concerns with "lipstick on a pig."

[DanteLabon]

I really wish I could belive that. Some Americans just never will get it. They put the blame everywhere except where it belongs...with them. The Bush repugs could never have done this to our country if the people hadn't let them by electing them and being dangerously uninformed on the important issues. I am as quick as anyone to blame Bush and boys for the sorry state of our country and economy, but if we don't figure how to knock some sense into a bunch of middle-class Americans we can kiss what's left of our country goodbye.

[RoloTomassi]

I share your fears on this. Many who will find talk of economics boring and completely out of their depth of understanding will gravitate to cultural sound bites that they can relate to, and so put the entire set of issues relating to the economy out of play.

We can only hope that those who understand enough about these issues will out number those who don't at the voting booth.

[WIpatriot]

The HAVE to believe it, jean. Otherwise, their lives are meaningless and that is just an unacceptable alternative.