Deficit Deceptions

IBD Editorials ^ | 18 June 2007 | Staff

[Kitten Festival]

Journalism: President Bush has been criticized unmercifully by politicians of all stripes and media of all types for failing to rein in federal spending and letting deficits "soar." But is the criticism fair?

The answer, in a word, is no. It's fashionable these days, for Democrats and even some Republicans to style themselves as "fiscal conservative" to advocate the end of government red ink.

Some of them mean well, to be sure. Certainly, no one wants to see a budget deficit forever — or one that expands to a point that it impairs our government's ability to function.

[Kitten Festival]

Democrats will say anything to win votes.

[Huck]

The link doesn’t seem to work, but I think we’ve all seen the GOP apologists at work before: he inherited a recession, he had to fight a war, dot com bubble, etc. As if other presidents had nothing but smooth sailing. Deficits went down in 92, 93, 94, 95, and 96. We had surpluses is 97,98, 99, 00, 01. Then under GOP control it went right back to deficits ever since.

[ex-snook]

"Then under GOP control it went right back to deficits ever since. "

It's called tax breaks today, send the tax bill to the kids.

'But we are in a world war we have to win' if that's not bull start the draft, sell war bonds and start gas rationing.

[DManA]

Of cource the critisism is fair. Only our vibrant private economy bailed him out. Think how far ahead we’d be if spending handn’t skyrocketed. And what about the future train wreck he’s set us up for?

[vpintheak]

Dimrats will say do anything to get votes and money. Republocants will do anything to help their buddies and themselves get rich. Our wonderful US Congress.

[Huck]

'But we are in a world war we have to win'

We're in a "boots on the ground" war in Iraq and Afghanistan, not the world. And it sure seems like the admin is to blame for mismanagement. I actually heard generals saying they never planned for an insurgency, that Franks et al didn't plan on it. Are you kidding me?? Total negligence. I don't think we need a draft, and I don't see what the rationale for gas rationing would be, but we might as well have had war bonds--why not? Right after 9-11, you could have sold a billion of them. It's turned out a lot of the Democrat criticism was true. if that's not bull start the draft, sell war bonds and start gas rationing.

[Huck]

sorry bout that last sentence...just exsnook’s quote there by mistake.

[Ken522]

Huck, there never was a surplus ...

[Beachman]

I am honestly puzzled when I read discussion about the surpluses in the 1990s. If there were annual surpluses, the National Debt should have gone down. Yet, if you check the annual National Debt figures (see link at http://www.treasurydirect.gov/NP/BPDLogin?application=np) it never happened. It came close to stabilizing, but never actually decreased. Perhaps there are some technical reasons why this is so, but I think there was more wishful thinking than actual surpluses (also read impartial assessments during the late 1990s on how the budget figures were going to worsen in the future due to unrealistic assumptions).

[Huck]

Oh yeah, the old “there’s no such thing as a surplus” gag. Another favorite of the apologists. I grant you it’s worse than it seems, but even so, it’s that much worse still under GWB.

[remember]

The link doesn’t seem to work...

It didn't work for me either but I found copies of the article at the following locations:

http://www.ibdeditorials.com/IBDArticles.aspx?id=266799073267524
http://ca.biz.yahoo.com/ibd/070615/issues.html?.v=1
http://news.yahoo.com/s/ibd/20070615/bs_ibd_ibd/2007615issues
http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=266799073267524

[remember]

Huck, there never was a surplus ...

I am honestly puzzled when I read discussion about the surpluses in the 1990s. If there were annual surpluses, the National Debt should have gone down. Yet, if you check the annual National Debt figures (see link at http://www.treasurydirect.gov/NP/BPDLogin?application=np) it never happened. It came close to stabilizing, but never actually decreased. Perhaps there are some technical reasons why this is so, but I think there was more wishful thinking than actual surpluses (also read impartial assessments during the late 1990s on how the budget figures were going to worsen in the future due to unrealistic assumptions).

If you count all federal receipts and outlays (as is the case with the "unified deficit"), there was a surplus from 1998 through 2001. However, if you exclude Social Security and all other trust funds (as is the case with the National Debt referenced by Beachman), the deficit reached a low of 23.2 billion in 2000 but never quite became a surplus. I do think that the latter measure is more meaningful since most, if not all, of the monies that have been borrowed from the trust funds will have to be repaid. Over half the the monies have been borrowed from Social Security and that is projected to be fully repaid within 40 years. However, if you except this more meaningful measure, you also have to accept that the U.S. has run deficits of over a half-trillion dollars per year since 2003 and is projected to continue this through 2009. You also have to accept that the article's statement that "the deficit will be erased by 2010-2012 at the latest" is utter baloney. According to Bush's most recent budget, the gross federal debt (the National Debt mentioned above) will increase $372 billion in 2012! In any case, the following graph shows these various measures of the deficit since 1970:

The actual numbers and sources are at http://home.att.net/~rdavis2/def08.html. The purple line shows the "unified deficit" that politicians in both parties usually refer to. The red line shows the annual change in the gross federal debt, the debt that just passed $8.8 trillion.

[DManA]

Funny how that period around 2000 looks exactly like a bubble.

[remember]

Funny how that period around 2000 looks exactly like a bubble.

Yes, it's a sad statement on our country's finances that we need a bubble to get to a surplus (or small deficit if you exclude the monies being borrowed from Social Security and other trust funds). To better judge what portion of this improvement in the budget was due to a bubble, it's helpful to look at the change in receipts and outlays, shown in the following graph:

The actual numbers and sources are at http://home.att.net/~rdavis2/recsrc.html. As can be seen, the cause of the improvement was fairly evenly split between an increase in receipts and a drop in spending (as a percentage of GDP). The second graph at that link shows that the increase in receipts was chiefly in receipts from individual income taxes. Some of the initial increase may have been due to the 1993 tax increase but much of the later increase was likely due to increased capital gains receipts driven by the tech bubble.

The drop in spending seems less like a bubble but may have been helped by the so-called "peace dividend". Hence, one might call the period of peace and prosperity that helped support the drop in spending something of a bubble. In any case, I would agree that the existence of the tech bubble makes it difficult to judge how much the improved budget was due to the policies of Clinton and the Congress. However, this is likewise the case with the increase in revenues since 2004. As the graph shows and the IBD states states, "by 2004, they [receipts] had plunged to 16.3% of GDP, lowest since 1959". Much of the recent increase in receipts is likely just the normal recovery in revenues after a sharp downturn. In any event, all projections seem to agree that we are likely in for difficult budget pressures. As the IBD article states, "In just the next 10 years, Medicare and Social Security costs will jump from 8.5% of GDP to 10.7%, as 76 million baby boomers start to retire".

[DManA]

Even harder to interpret since the ordinate of the graph is percent of GDP and the GDP bubbled up too. An interesting question is did government policies contribute to the bubble or is it a pure market mania phenomenon.

Good info, thanks.

[RockinRight]

Here’s a thought:

Cut spending! Or, even freeze it - no cuts, but no increases, for several years. And guess what? The budget will balance itself as the economy grows.

[remember]

Here’s a thought:

Cut spending! Or, even freeze it - no cuts, but no increases, for several years. And guess what? The budget will balance itself as the economy grows.

Unfortunately, that's much easier said than done. In order to freeze the value of services, you need to increase spending by the rate of inflation. For very individualistic services, such as Medicare, you also need to increase by the growth in the population being served. The following graph shows federal spending since 1940 in real (inflation-adjusted) dollars:

The actual numbers and sources are at http://home.att.net/~rdavis2/outcon08.html. As can be seen, the spending that is growing the fastest is Social Security, Medicare, and Health (most of which is Medicaid). In order to reach balance by 2012, the most recent Bush budget projects that there will be real cuts in spending on National Defense and Other Outlays. National Defense spending is projected to increase through 2008 but it is then projected to drop to just under its 2004 level by 2012. Other Outlays spending is projected to start dropping immediately and to drop to under its 2002 level by 2012.

These U-turns in spending have been projected in prior budgets and are yet to occur. Likewise, the currently projected drops in spending will likely never materialize. Afterall, if we can't cut spending in conjunction with a popular policy like tax cuts, how do we expect to cut them in the absence of such a policy? The best hope I think is to reinstate pay-go. At least then we will have some motivation to cut spending.

[ex-snook]

Thanks for your efforts here. The best hope I think is to reinstate pay-go. "

'Pay as you go' is the only way to restrain government spending. Asset costs such as bridges, highways and military equipment should be amortized as yearly costs.

[remember]

'Pay as you go' is the only way to restrain government spending. Asset costs such as bridges, highways and military equipment should be amortized as yearly costs.

Agreed.