The Deficit Blame Game

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).

Presented by

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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