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Deficit spending: Part 1 – how we got here

January 27, 2013

There is fear and outrage at how large our deficits are. And, at 1+ trillion out of a 16 trillion dollar economy – there well should be. This is part one of a two part post. It is an analysis of how we got here, and a clear look at WHY we are here. The media likes to portray Obama and or Bush as big spenders. This post looks at the facts in that regard. The facts (based on comparing the last balanced budget to Bush’s last budget year) indicate claims that Bush left the United States of America with a one trillion dollar structural deficit are correct.

2009 is the pivotal year. To the casual eye, it appears Bush had declining (but HUGE) deficits from the mid 400 to mid 100 billion dollar range (once the tax cuts took effect). Then in 2008 the deficits turn on a dime and explode to nearly 500B.

deficit chart 1940-2012

Inflation adjusted chart of deficits

And in 2009 deficits triple! So, the question MUST be asked – what happened!?! (spoiler alert: TARP barely effected the deficit; ARRA (aka the Stimulus) also barely effected it). Let’s compare the picture from fiscal year 2000 (reference year because that is the last year the budget was in balance).

2009 budget changes from year 2000 budget:
356B Defense
(314B) Revenue   [2004 revenue (.998T)- 2004 revenue with no tax cut (1.416) less 25% of economic growth arguably due to stimulative effects of tax cuts]
+154B Tarp
+21B Interest expense
+26B Investments in education, training employment and social services
+180B Health (non Medicare)
+124B Income security
+49B Veterans affairs
+360B Energy, Natural resources, housing, transportation and Community/Regional Development
+50B ALL other functions of government

~1.6T in debt- that is the net effect of Bush budgets – and the similarity of that figure to the deficit itself in notable; almost ALL of Bush fiscal policy was deficit creating. HUGE growth in government, led by the defense runup, the cuts to government revenue with NO cuts in spending; beyond that, 360 billion mostly in the category “Commerce and Housing credit” (one presumes the fabled Bush “ownership society”/the housing meltdown).  And of course the beginnings of the uptick in safety net spending due to the Bush recession (largely caused by the Bush runup in spending and other polices (ie ownership society (although Clinton also set the stage with low income loan requirements and relaxing government banking regulations)).

Of the above – $203B is due to Obama. The rest is the decade long runup in Bush spending.
+114B ARRA (Stimulus)  (the rest spent in later fiscal years)
+89B Obama spending increases in March 2009 appropriations bills

The reasons the numbers don’t add up to 1.4T is the figure for “revenue lost” is calculated for one year (2004), but applied in 2009 – when we had a larger economy and minor disparity in numbers pulled from a variety of sources.

Deficits are a function of tax cuts with no corresponding spending cuts; rather increased spending

If we ended the Bush/Obama tax cuts

CBO data that verifies that 1.2 trillion of the 2009 deficit belonged to Bush.

CBO projects that the deficit this year will total
$1.2 trillion, or 8.3 percent of GDP. Enactment of an
economic stimulus package would add to that deficit.”

The CBO report came out on January 7, 2009 – two weeks before Obama was sworn in. So we KNOW 1.2 trillion of the 2009 deficit (the inauguration of the 1 trillion+ budgets) came in under Bush

______________________

OK – so 2009 is the critical year in that the deficit goes from scary to terrifying. Let’s look at what has happened since (all data Treasury unless otherwise noted):

2009 1.4T
2010 1.3T
2011 1.3T
2012 1.1T
2013 900B (projected by OMB)

We are one third through 2013, so projections are likely reasonable, but the latest OMB report will be more accurate – reflecting the fiscal “cliff” outcome and continued slow recovery.

The 200B per year drop in the deficit since the crisis ended in 2011 is notable – adding up to a 35% reduction already (Obama promised 50% and delivered 35.7%). The data above is the accurate background for part II – how to get out of debt. It really is not hard and many Americans are embarrassed our government pretends it is such a huge challenge.

One thing our politicians are missing is analysis like the above – which shows where and how we got here, and of course points the way to how we get out.

{a note on tax cuts. It is very hard to winnow out the actual impact of tax cuts – both on revenue to the treasury and on GDP (interrelated problems). Here the tax cuts receive 25% of the credit for economic growth from 2000 to 2004. How and why would be another post. The second note is that the effect of any stimulative tax change is short term – the economy jumps up as people respond to the new money in their pocket, then reverts to pre-stimulative rates. And of course tax cuts which create deficits (as Bush’s did every year) should, in theory, have zero long term effect.}

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