The Deficit Blame Game

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I am a long-time believer in the notion that nobody cares about the budget deficit.  People say they care about the budget deficit, but people say they care about a lot of things.  Almost everything, in fact.  What people flogging the budget deficit actually care about is the programs it goes to pay for.  Every time the presidential party turns over, I get the pleasure of watching deficit-hawk Democrats suddenly discover that borrowing hundreds of billions of dollars actually has no moral or economic implications, especially when compared to national health care.  Meanwhile, Republican scientists who presumably spent the last eight years locked in a vault in the basement of Heritage run out into the metaphorical street screaming that they have just made a shocking, horrible, and totally unexpected new discovery:  budget deficits will make the economy melt down into a pool of manufacturing-depleted sludge, and also, cause rabies.

Economically, much of the talk about deficits is hysteria.  A budget deficit of less than 4% of GDP is not a good thing, but it rarely results in catastrophe either, because inflation and GDP growth steadily erode the value of past debt.  As long as the deficit is less than inflation + GDP growth, the government is unlikely to get into much trouble.  It's possible that this borrowing may crowd out private borrowing, but at least over the last decade, this has obviously not been the case. 

The reason not to run budget deficits (other than in times of war and depression) is prosier:  it's bad political economy.   Governments shouldn't run deficits to fund ongoing spending for the same reason that it's not a good idea to run up credit card debt to pay for groceries.

But that's not the point of worrying about the budget deficit.  The point of worrying about the budget deficit is to bash your political opponents.  Why this works, given the obvious hypocrisy of all parties on this score, is beyond me.  But apparently it does, or at least a lot of people think it does, and so we're stuck with the current silly debate over how bad our budget deficits are, and more importantly, who we can blame them on.

Hence this graphic from David Leonhardt and the New York Times has touched off another round of how much can we blame on Bush?



These responses from Andrew Sullivan and Kevin Drum, both serious people, are about par for the course:

Kevin writes:

That is: It Was President Bush, Stupid.  That's just a thumbnail on the right, but you can click on it to see the full-size version.

While Andrew says:

Overwhelmingly: the GOP and Bush, a fact the vast majority of the right simply ignored for the past eight years. Leonhardt lays out the facts that Glenn Reynolds and his fellow partisans  keep denying

Well, actually, I think there was a Democratic congress involved a couple of times.  But who cares?

No, I mean that seriously.  Who cares?  The whole debate seems totally weird to me, and highly inflected by an arbitrary choice of endpoints which makes it seem as if George Bush squandered an $800 billion deficit bequeathed to him by Clinton, which was his sacred duty to preserve in amber.

But, just for starters, that $800 billion was not a real number.  The budget surplus was $232 billion in 2000, about $292 billion in today's dollars, or about 2.5% of GDP.  That is, coincidentally, about what we lost in revenue when the stock market bubble burst and we lost all that lovely capital gains revenue. The imaginary number comes from assuming "current law" as of 2000.  Due to some quirky rules, this does not just mean assuming that Bush didn't spend more or tax less than Clinton.  It actually means assuming away some things Clinton *did* do, like the $50 billion annual "temporary" AMT fix.

Moreover, even if this had been something like a real number, we would not have arrived in 2008 with an $800 billion surplus.  Any president would have done about what Bush did--some combination of spending it, and cutting taxes.  The American public was not going to happily pay an extra 6% of its income to Uncle Sam so that we could pile up some massive wad of cash.  And if they had, by 2008, we'd simply have been pointlessly imposing deadweight loss on the American public through unnecessary taxes.

The correct assessment, I think, is how much of the change from zero that Bush bequeathed Obama.  And there, the picture is more complicated.  Bush left a very small structural budget deficit--until the massive financial crisis.  The change since then has mostly been either structural (tax declines), things that Obama participated in as president-elect or senator (the bailout) or things he authored (the stimulus).

But more importantly, the deficit now is not what matters.  Any Republicans who are using it as a political tool to bash Obama should be ashamed of themselves; whatever you think of the stimulus package, one year of massive borrowing is not going to kill us, and the impact on future generations will be small.  

The graphic's equally arbitrary end date obscures the real worry:  the years after the current crisis.  By then, it will make about as much sense to blame them on Bush's fiscal policy, or Medicare Part D, as it would on FDR's fiscal policy, or Medicare Part A.  Social Security and Medicare Parts A-C will be driving far more of Obama's deficits than anything Bush did.

Don't believe me?  Iraq is now at $120 billion a year, and scheduled to decline.  It seems churlish to blame Bush for Medicare Part D, given that the Democrats' main complaint was that it wasn't expensive enough, but let's go ahead and blame him anyway:  $35 billion a year. The tax cuts sunset in 2010; after that, Obama has to affirmatively act to extend them.  The structural deficit projected in 2010 was a little over $100 billion. 

But what about all the debt he racked up?  Net public debt rose less than 4% of GDP during Bush's presidency.  Net interest (aka Cash Interest We Pay Bondholders) went from $223 billion in 2000 to $244 billion in 2008; adjusted for inflation, and as a percentage of GDP, it actually fell.  If we are entitled to expect Bush to close the budget deficit with those kinds of numbers, then we ought to be able to expect it from Barack Obama.  Bush's deficits are not holding him back.

But this is what we have been told to expect:




How is a $118 billion structural deficit, $35 billion in Medicare Part D, and a theoretical end to the Iraq presence forcing Barack Obama to spend nearly $1 trillion in 2018?  How is it forcing him to spend roughly $650 trillion more than he takes in in 2012? 

This is not Bush's fault.  And you know what?  Even if it were Bush's fault, who cares?  It's like those people in their thirties who spend the whole decade in therapy and get into long weepy conversations over bottles of wine about how they can never have a healthy relationship because their father was so cold and distant, and their mother was a perfectionist harpy.

I mean, hey, it sounds like your parents were terrible.  But this is not actually very useful information.  Dad could get down on his hands and knees and admit that he was the most horrible father in the entire world, and beg for your forgiveness, and guess what?  You're still lonely and balding and drinking way too much mid-priced Chardonnay.  No matter what Dad did, he can't fix it.  You have to be the one to call your girlfriend and say "I love you."  If Dad does it, she'll just get all creeped out.

The problem with the budget deficit is not any particular program, or even any particular tax cuts.  It is not that George Bush or Obama is a bad person who does bad things.  The problem with the budget deficit is that, unlike the deficits George Bush ran, the deficits projected under Obama (and beyond) are actually large enough to potentially precipitate a fiscal crisis.  If our interest rates suddenly spiked up, perhaps because lenders were worried about the size of our budget deficits, we'd find ourselves in the kind of nasty fiscal jam that regularly plagues third-world countries.  The difference is, no one has enough money to bail us out.

Obama is the one who will have to prevent this.  Yet instead of plans, we're getting fairy numbers from the OMB.  That's worrying, and it's sure not George W. Bush's fault.  His OMB liked to inflate the deficit projections, so that they could take credit for a mostly imaginary reduction.

Not that I want to use the budget projections to bash Obama.  For one thing, those out-year projections have hte same fantasy quality as that $800 billion surplus we never had; reality will be very different, and if it follows the pattern of the last ten years, the deficits won't be as high as these projections.  (Though cutting them in half would still leave a giant deficit). Also, I assume that Barack Obama does, in fact, have some plans to cut the deficit.  I probably won't like those plans, since I expect they involve hog-wild spending and very large tax hikes. 

If (when) he does those things, I'll probably scream like a stuck pig.  But I promise to confine my criticism to the actual programs, not their theoretical effect on the budget deficit.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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