Deficit Deceptions
By INVESTOR'S BUSINESS DAILY | Posted Friday, June 15, 2007 4:20 PM PT
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?
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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.
But we're so far from that right now it's easy to think those who push for the immediate elimination of the deficit have another agenda entirely. Unfortunately, it's hard to have a rational conversation about it. It never comes down to facts, of which there are plenty, but to fears, of which there are always more.
Let's start with facts.
Last year, the deficit hit $248 billion. Sounds like a lot, but in a $13.6 trillion economy, it's not. It's the equivalent of a $900 dollar credit card charge for someone with a $50,000 income.
As a share of GDP, the budget deficit last year was 1.9%. That's down from 3.6% in 2004 and below the long-term average of 2.5%. This year, says the CBO, the deficit will be about $177 billion, or 1.3% of GDP. If current trends continue, the deficit will be erased by 2010-2012 at the latest.
By the way, those "surpluses" in the final years of the Clinton administration were a fluke. If you don't believe it, go back and look at the Clinton administration's own forecasts. They never saw the surpluses or record tax revenues coming.
They were a creation of an unusually powerful upswing in the economy, pushed by a number of factors: Fed interest-rate cuts, the advent of the Internet and the boom in Big Box discount retailers, such as Wal-Mart. It was a perfect storm of economic growth.
Those who accuse President Bush of "spending" the surpluses and creating "soaring" deficits miss the point. Bush took office just as both the stock market and the Internet boom were collapsing, taking the economy with it. As we've noted before, the stock market alone suffered losses of more than $7 trillion. The negative wealth effect from that hit alone was enough to tank the economy.
The year 2001 was one of both recession and a major terrorist attack on our nation, which killed 3,000 people and destroyed hundreds of billions of dollars in potential output.
Let's go to logic 101: Given such a situation, what should Congress and the president do? Sharply cut spending to ensure that the deficit remains small, and risk sending the economy into a tailspin?
Or keep spending, and maybe even increase it a bit, knowing full well that any discretionary spending that was made today can be cut tomorrow?
No, we don't like pork-barrel spending. Nor do we like big government, an issue we've written much on in the past.
That said, does the spending of the past six years really constitute unusual "big government?" We would argue, no. Using the most meaningful measure of the size of government — spending as a share of GDP — we see that in fact we're today right where we were in 1996 — about 20.3% of GDP. And it's declining. This year, spending as a share of the economy is expected to fall to 19.9% of GDP.
If you look at the chart, you'll note that's actually below the average of 20.7% of GDP since 1970. Spending boom? Hardly.
Then where did the deficits come from? As we noted, the economy's decline in 2001 had a far bigger fiscal impact than first thought. Revenues in 2000 were 20.9% of GDP; by 2004, they had plunged to 16.3% of GDP, lowest since 1959. This year, revenues returned to 18.6% of GDP, above the long-term average of 18.2%.
So it was falling revenues, not higher spending, that caused the deficit. It may well be that by keeping spending within its normal range as a share of the economy, Bush kept a mild recession from becoming a very nasty one.
For those who argue the deficit is such a bad thing that we need to raise taxes to get rid of it, this too is wrong.
As Nobel-winning economist Edward Prescott has noted, workers are highly sensitive to tax rates. They work and earn more when rates fall, less when they rise. It's common sense.
That was the choice President Bush faced in 2001. Keep spending money during a time of extraordinary uncertainty, and cut taxes. Or do nothing or even boost taxes and risk the consequences. Given the current five-year boom we're in, he chose wisely.
As we noted before, an extensive analysis by the Heritage Foundation found President Bush's tax cuts each year boost real GDP by $75 billion, employment by 709,000 and real personal income by $200 billion. The benefits are huge and ongoing.
Are we Pollyannas about deficits? Not at all. Long term, we agree there's a problem. It's a result of entitlement spending. If we don't control that, we're in big trouble. 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. We have to fix that — something, by the way, Bush tried to do but got little help.
Still, we've had deficits in 24 of the past 27 years. During that time, real GDP has grown 122% to $11.5 trillion, 46 million new jobs have been created, bank interest rates have fallen from almost 20% to about 8%, 42 million new homes have been built and per capita incomes have almost tripled.
In short, none of the dire things predicted about deficits came to pass. We're the wealthiest country in history, and we're putting more distance between us and our nearest competitors each day.
Why do liberals ignore the facts about our deficit? They believe it when the media spins it?
This article omitted the #1 factor in our spending since Bush got what he wanted: a war with Iraq.
We cannot have a blind spot and say that all these billions spent on Iraq don't count as spending and don't deepen our debt. My question to Republicans is: "Who's to pay for this war?" Every time the neo-cons criticize the Dems for being tax and spend but they don't see anything wrong with "borrow and spend" Again, who's going to pay for this war? You give tax cuts to the super rich; shouldn't those with the most property to protect pay for the protection?
Wasteful spending is crazy on all sides, but too often the GOP treat education as "wasteful spending." As a teacher, I'm a Democrat and I don't hear any intelligent reasons to be otherwise.
By the way, the media is very moderate in my opinion, except Fox News, which are avoiding the topic of who's going to pay for this war.
Reply:You are seriously posting this and complaining about spin at the same time? In case you hadn't noticed, there is a lot of spin in this article as well. There are "facts" that don't support anything, but sound good. For example, what does the number of homes built in the last 27 years have anything to do with anything?
Reply:So tell me, why are we borrowing money from China? How much has our President spent so far on this conflict in Iraq? How much more will he spend? From what I see he is spending along the lines of a hundred billion a year.
People might want to take a look at this in rebuttal to your post.
http://zfacts.com/p/461.html
Two sides to every story and somewhere is the truth. Which do you believe?
Reply:They ignore the facts because its all political. Alot of libs are uneducated and angry. Why do you think they support amnesty? More voters! Combine that fact with the liberal slanted media and you have a self serving system of lies that hurt the country.
People need to wake up and see that we don't live in a perfect world! There are terrorists that want to eliminate everyone else! There is a need for the rich to reinvest into our economy. There are poor, not because there aren't opportunities but because they are lazy! Libs need a reality check. They seem to leave responsibility at the door. Pay for my health care, I want abortion on demand, tax those who earn money, the terrorists are just misunderstood seem to be the irresponsible motto's of the Libs.
I'm sick of it!!
P.S. for the Clinton robots. Clinton left us with a recession. Because of Bush's deficit spending and tax cuts we have an incredible economy. Clinton balanced the budget because Reagan ended the cold war and Bush 1 was ALREADY REDUCING GOVERNMENT SPENDING!! Looks like Clinton didn't do s**t.
Reply:BE CAREFUL! You're posting unbiased facts! Something liberals and right wing republicans can't stand. No way to spin them!
Reply:Could you create a made for MTV video with that information? I think it is their medium.
Reply:Why do so-called conservatives keep ignoring the facts about our deficit? Look at how it has risen since Bush %26amp; Co. has been in charge with a compliant Republican Congress.
Reply:The problem with retards like the one asking this question is that they get their information from Fox News and Fox News only. The deficit here in the US is common knowledge to the average educated person. Apparently the person posting this question doesn't qualify for that ranking.
Reply:When "liberal" Bill Clinton was President, he balanced the budget. Three times. He took us from record deficits to record surpluses. Then Georgie Bush took over, and he took us to new record deficits, breaking the record of the President before Clinton. His Daddy must've been so proud.
There would still have been a deficit if you take either EITHER his top-one-percent tax cut OR his war of choice in Iraq. Whereas, if neither had happened, we'd probably have a surplus now. And a continuation of the booming economy of the 1990s, where jobs were created and wages went up in relation to inflation. In other words, there is a HUGE difference between the two major parties: Democrats have a clue on the economy, Republicans don't. Sometimes by choice.
Reply:Thanks for posting a novel to point out the obvious.
Reply:Thank you. And as a couple of the answers show, they didn't read it or didn't understand it.
Economics for most is a tricky subject. Most folks look at it as a Snapshot in time. Like we can directly compare point A to point B. Economics is also not an easy discussion topic. Folks who talk about the National Debt think it's like a Credit card and how much you owe. It is actually based on a method of forecasting used first by the Ancient Greeks, then the Romans. It is NOT a tool to measure "How much we owe".
Borring from China? Actually they Borrow from the U.S. when they buy our Securities and Treasuries.
Again, there is no "Easy, MTV" version as people want to know about today.
As such, most discussion on the Economy and what folks say is rather amusing. Quoting figures that have nothing to do with subject they refer to.
For the guy who asked "What does 47 million houses in the last 27 years mean". How can you have a conversation with someone who dosn't understand jobs, and a strong Economy?
Good work.
Reply:Nice to see the deficit analysis...what about the national debt? Too bad the debt keeps rising. Right now, if each of us were to pay an equal share to eliminate it, we would each pay nearly $30,000. Care to donate?
http://brillig.com/debt_clock/
Reply:Here's another little factoid. A decade ago, servicing the interest on the national debt took a bite of 16% of the tax revenues. Today that bite is just 10% despite increases in the debt. Why? Because tax revenues have surged under Bush's tax and economic policies.
There's one thing I want to take issue with though. When in an economic slowdown, it's OK to deficit spend to do things to stimulate the economy, like that tax cut. However, the converse is true. When the economy is booming, as it has been since 2003, it's time to stop the deficit spending. Bush hasn't. In fact, he's pushed through an enormous new entitlement program. The last 2 years, tax revenues have grown rapidly, but so has federal spending.
Reply:Oh yes we're so successful we're borrowing money from Communist China.
http://budget.house.gov/
Since youre so successful, go ahead and pay MY share of the National Debt. It's a little over $29,000 as you can see from the link (see real people with actual provable positions provide links so people can see for themselves). That $29,000 is due from the littl baby which was just born in Dallas, she owes $29,149 before she even gets her ID chip and SS number.
Yaah we're in good shape. The Earth still flat where you live?
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