THE BLOG

The Politics of the Budget Deficit

04/25/2011 05:12 pm ET | Updated Jun 25, 2011

The federal budget showed a surplus of $185.2 billion in 2000. By 2010 it was in deficit by $1.3 trillion. What happened? Only after that question is answered is it reasonable to discuss what we should do.

The numbers are clear: between 2000 and 2010 tax revenues declined from 21.5 percent of the economy's Gross Domestic Product (GDP) to 16.3 percent. During these same years, federal government expenditures increased from 19.6 percent to 25.4 percent. The budget surplus disappeared because revenues declined by 5.2 percent of GDP and expenditures increased by 5.8 percent. 1

It does not take much investigation to explain the contrasting trends in revenues and expenditures. The two tax cuts passed during the Bush Administration, combined with the two recessions that occurred during that administration, starved the government for funds. At the same time, defense expenditures increased dramatically -- from 3.7 percent of GDP to 5.6 -- while health care rose from 5.0 to 7.3 percent in 2009 (the most recent available data). This means that increased health care and military spending together were responsible for about three-quarters of the growth in government expenditures as a percentage of GDP that occurred during the last decade.

Economic downturns and tax cuts, combined with increased military expenditures and escalating health care costs, were clearly the villains. Logic therefore would suggest that these are the areas that need to be corrected. The economy's vulnerability to crises should be reduced, the Bush tax cuts rescinded, defense expenditures curbed, and the health care sector made more efficient.

But as obvious as these corrective steps might seem, the dominance of wealthy special interests in our political system makes it unlikely that any of them will be implemented. Despite the financial debacle of 2007, Wall Street continues to ride high and the economy remains vulnerable to a financial meltdown. Reducing health care costs will require taking on powerful special interests in a way that the Obama Administration has shown no stomach to do. Increasing taxes on the wealthy at a time of mounting income inequality is so obviously a matter of justice that it would seem not to require much of an argument. Yet spokespersons for the elite like Arthur C. Brooks of the American Enterprise Institute recently argued in The Washington Post that increasing taxation on the rich will damage not only the economy but the meritocratic ideals upon which the country rests. 2

Then there is the question of defense spending. The fact is that the importance of the military in the American economy far exceeds that anywhere else in the world. Most Americans are unaware of that imbalance or its implications. But the fact is that defense spending in the United States as a share of GDP is at least twice as high as in any comparably developed country. In contrast to roughly 5 percent of GDP in the United States, France stands out as the big spender in the European Community at 2.4 percent. The United Kingdom's level is 1.7 percent. 3

This commitment to the military is particularly anomalous because the United States is a relatively low tax country. Defense spending here therefore claims a significantly larger share of the overall budget. One estimate has it that United States spends 19.3 percent of budget appropriations on the military, in contrast to 6.3 percent in the United Kingdom and 5.4 percent in France. 4 The consequence is that desirable social and labor market policies are crowded out for lack of funds much more so in this country than in Europe. The people who most need social support are the same people who pay the cost of our military expenditures.

Given the configuration of power in our political system and in particular the dominant role of wealth, it is all too likely that in addressing the budget deficit, legislators will inflict a grave injustice on large numbers of people. Middle and low income households were not responsible for the budget deficit. But it is the programs from which they benefit that are most likely to be on the chopping block. The deficit emerged because rich people succeeded in achieving major tax reductions, Wall Street decimated the economy, the costs of health care remained exorbitant, and the growth of defense spending remained unchecked. Yet as things stand, none of these will be the object of political redress.

It is at times like these -- when real and important choices have to be made - that the fundamental dysfunction of a political system based on wealth is most obvious.

1. Statistics from this and the next paragraph are from the Bureau of Economic Analysis, U.S. Economic Accounts, http://www.bea.gov, Table 3.2, 1.1.10, and 3.12
2. Arthur C. Brooks, the Washington Post, April 24, 2010, p. B-1
3. The World Bank, "Military Expenditures as % GDP," http://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS
4. "How Countries Spend Their Money," % of Total Budget Allocated to Military, http://www.visualeconomics.com