We Can’t Change the Past
June 10th, 2009 . by economistmomIn today’s New York Times, David Leonhardt reflects on the dismal outlook for the federal budget, sorting out how we got to such a sorry state–and wrestling with a question a lot of us are struggling with these days: how much of this can we blame on a new president who’s inherited such a mess from the former president?
David first lays out these facts (based on CBO numbers, emphasis added):
The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.
You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.
The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.
About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.
Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.
About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.
That President Obama’s “contribution” accounts for only about 20+7+3 = 30 percent of the fiscal deterioration–less than either the effects of the weak economy or the policies that President Bush signed into law–makes it sound as if we should get off President Obama’s case and stop accusing him of being a (too-)big spender, or as David puts it:
President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying.
On the other hand, David acknowledges that:
Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.
One could look at President Obama’s 30-percent share of the fiscal blame and say “damn that cursed recession” and “damn that profligate Bush Administration” and “stop picking on our new President–he’s doing the best he can with the mess he inherited and the economy he’s got to work with.” (I myself say some of those things some of the time.) Or one could stop dwelling on the past–which we cannot change–and look ahead to what we can change, or rather, what President Obama can change.
Of the 30 percent “Obama share” of the fiscal blame, already 7 percent is a thing of the past–the stimulus/recovery package already passed. That leaves only 23 percent that’s not yet given away and at least to a large extent (if not completely) within our new president’s control. We can look at that as a glass 77 percent empty (100-23), or a glass 23 percent full. I prefer the latter, because 23 percent of trillions of dollars is a lot of money.
So of the 23 percent within President Obama’s control, it’s significant that only 3 percent comes from his “agenda on health care, education, energy and other areas.” In contrast, 20 percent–or 20/23= 87 percent of what’s under President Obama’s control–is comprised of President Obama’s proposals to continue President Bush’s policies (almost entirely the Bush tax cuts). The new president is not just proposing to extend the old president’s policies; he’s also proposing to continue to entirely deficit-finance the old president’s policies even though he’s willing to pay for his own. (That’s the big reason why 20 percent is Bush policy extended and only 3 percent is new Obama policy, in terms of the contribution to the fiscal deterioration.)
I like how Alan Auerbach puts it (later in David’s article), emphasis added:
Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study [with Bill Gale of Brookings] on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.”
“And,” he added, “not fixing it is, in a sense, making it worse.”
The Obama Administration can’t change the past and in particular cannot go back in time to 2001 before the Bush tax cuts were passed when we were facing ten years worth of surpluses of $5.6 trillion. Instead, here we are today facing ten years worth of deficits of $4.4 trillion under current law. But with CBO projecting that the ten-year deficit under President Obama’s budget proposals would be $9.3 trillion (more than double that under current law), it’s clear that there’s still a lot that’s the Obama Administration’s “call” and that there are many different places we can “get to from here”–even if one of them isn’t “back to 2001.”
The glass is 23 percent and trillions of dollars full, so let’s try to make the most of it going forward and stop living in the past!
As an American citizen, I am so angry about our ballooning debt. Instead of playing the blame game, the Obama administration and Congress have to find solutions to resolve the deficit crisis.
From an average Joe point of view, we should do the following:
1. Kill the Obama tax cut program for the middle class.
2. Raise the income tax even higher for the wealthiest 5 percent of Americans. I think the wealthiest 1 percent should contribute at least 60 percent of their income to the US treasury.
3. Deep cuts in military spending. There’s too much wasteful spending by the Pentagon for useless hi-tech weapon systems. We are talking serious billions in savings each year.
4. Spending cuts with the entitlement programs are warranted as well. Although, I am strong believer in a single-payer health care system that would significantly reduce health care spending waste in the long term.
5. Raise taxes for household incomes exceeding $50,000. I only make $60,000 per year BUT it’s a crime that I don’t pay enough federal taxes. Dear President Obama, PLEASE RAISE MY TAXES!
6. Individuals should re-examine their lifestyles by getting away from excess materialism. Everyone should cut up their credit cards! Find religion. Build relationships with fellow human beings. Save your money for a rainy day.
7. It’s time for the United States to alter its trade policy so we can narrow the import/export gap. Mercantilism can be a beautiful thing.
I agree with Evan on nearly every point, but especially on #3. Number 7, not so much; mercantilism is rarely even a comely thing, much less beautiful.
The Japanese have enough money and plenty of plutonium to create their own nuclear deterren to the Chinese and North Koreans and a conventional force to repel an invasion of their island.
The Europeans have enough money and plenty of plutonium from British and French reactors to create their own nuclear deterrent to the Russians. They collectively have three times the population of Russia, so they can certainly field a conventional military sufficient to stop an Russian invasion even without using nuclear weapons.
Empire is bankrupting us and our allies are benefiting. The United States military has become a mercenary force for corporate control of the world economy.
We need to pull back from our dreams of world domination and say to the world, “If you have disagreements among yourselves, work it our how ever you will. We’re willing to be an honest broker in your disputes, but we’re not going to side with the status quo any longer. We benefited enormously when Europe destroyed itself in World War II, and it has recently occurred to us that we’re suppressing old hatreds to our own detriment. Have at it boys!”
At the same time, we should make it clear that we have the national technical means to identify the source of any nuclear device that might be detonated by terrorists in the United States and that we will glassify the country of origin — obviously excluding the Russians who probably could glassify us right back.
One thing is sure with point #2, if we raise the tax on the wealthiest 1% to 60% they will depart the country, or at least as many as can fit in Monaco and St. Barts will go. But I for one am not sure that’s the worst thing in the world, though. With the exception of a few tech billionaires, most of the wealthiest people in the country are not really entrepreneurs. They’re rent-seeking monopolists.
If the poor persecuted masters of the Universe left it would play hell with house prices in the Hamptons and Nantucket, but overall we might actually end up with a more competitive and vibrant economy.
But remember that the budget deterioration since 2000 is not the fundamental problem, no matter how much of it one blames on whom and what.
To see this, consdider GAO’s budget projections made in 2001 [.pdf] which assume surpluses continuing to run for more than a decade (still today), with no Bush tax cuts, no 2001 recession, no 9/11, no Iraq war, no 2008/9 recession, no Obama tax cuts or new spending programs, etc.
The result: Annual deficits reach 20% of GDP in the late 2040s at which time the projection is cut short because the cost of government is unsustainable. And that is basically the same projection as today.
How is that possible? Because the killer is not the deterioration in the official budget — the killer is the “off budget” liability for entitlements, unfunded federal employee pensions, et al., that when added in makes a total liability ten times larger that the national debt for on-budget items. At the end of 2008 the debt held by the public was $6 trillion, while USA Today’s latest story on the debt reports that adding liabilities for the “off budget” items raised it to $64 trillion.
A problem isn’t resolved by taking on 10% of it. If the only issue was the deterioration of the budget since 2000, without the “off the record” liabilities for entitlements, federal pensions, etc., we wouldn’t have a problem. But with those other >$50 trillion of liabilities, even if there’d been no deterioration in the budget and we were still running surpluses today, we’d still be heading for national bankruptcy on very near to the same schedule as we are now — as per the 2001 GAO projections.
we should … Raise the income tax even higher for the wealthiest 5 percent of Americans … Deep cuts in military spending. There’s too much wasteful spending by the Pentagon for useless hi-tech weapon systems. We are talking serious billions in savings each year.
Als, neither “the rich” nor the military have enough to cough up to even really start to close the gap, which is not serious billions but serious tens of trillions at present value. The military budget is 4% of GDP. The increase in the deficit caused only by Medicare and Social Security spending just by the 2020s is projected at 5% of GDP — so funding it by defense cuts wipes out the entire military and knocks it further into 25% negative existance.
Tax-wise we are talking about a 50% across-the- board income tax increase on everybody, “the rich” and everyone else, all persons and businesses, by 2030, for starters (or the equivalent, such as a new national sales tax with a double-digit rate) — with taxes rising perpetually from there.
The >$50 trillion comes on line as a real cash cost starting seriously over the next 20 years. It won’t have to be “paid off” but if it isn’t it will have to be carried, at an interest cost collected through taxes, as it is added to the debt held by the public.
Here’s some perspective. The SS Trustees project 6% as the long-term rate on T-bonds. The $64 trillion is $550,000 per US household, and 6% of that is $33,000 (and rises every year) in per household carrying tax cost. That’s where we are heading. Average US household income today is $67,000. This is, as they say … “unsustainable”.
It is the 90% of the problem that is being ignored that must be addressed, fixating on the 10% isn’t going to do it.