A number of my readers are claiming that the only reason Obama is running such a big deficit is that revenue has collapsed. I don't see that in the data:
These figures are in constant dollars, so they're unaffected by inflation/deflation, or the collapse in GDP; they're simply an assessment of the absolute increase in spending compared to taxes. As you can see, there's a huge increase under Obama--that huge upslope is the change between 2008 and 2009 spending levels.
To be sure, some of that is attributable to Bush. But most of TARP is turning a profit, funneling money back into the treasury; the actual net cost of TARP in FY2009 was $154 billion, but $108 billion is expected to be returned to the treasury in FY2010. If treasury ultimately loses money on the program, that will be mostly due to Obama's innovations like the auto bailouts. Then there's the $800 billion stimulus package, and assorted emergency spending.
Of course, you can argue that this spending was necessary, and at least in some cases, I agree. But I don't think that you can argue that the deficit is mostly just a result of collapsing tax revenues. That dotted green line I've drawn represents the growth rate of revenue in the final year before the financial crisis; had revenue continued growing at that rate (a not-too-shabby 4%), Obama would still be running a huge deficit.
But of course, "tax revenue growing more slowly" is not the same thing as "tax revenue collapsing". So really, to figure out how much of the deficit is due to tax revenues collapsing, we'd want to know how much of the deficit is due to an actual decline in tax revenue--that is, what would the deficit have been if tax revenue had stayed flat, at $2.4 trillion?
The answer is, it would have been about $900 billion. If you assume that "tax revenue collapse" refers only to an actual decline in revenue, then the breakdown is as follows:
- $150 billion 2007 Bush deficit
- $485 billion decline from 2007 revenues
- $750 billion spending growth
This should not be taken as an argument that Obama has increased spending by $750 billion, however. Obama has spent a lot of money, but a lot of that extra spending simply comes from the fact that government spending is designed to grow. It grows in good times, and it especially grows in bad times, as entitlements add beneficiaries who have been hurt by the economic setbacks.
The point, rather, is that the belief that the deficit is "mostly" due to collapsing tax revenues is only technically true in that, if you assume robust revenue growth had otherwise continued, the deficit would "only" be a colossal $600 billion, instead of a sickening $1.4 trillion. If you use different assumptions, then spending emerges as the major culprit. And either way, I don't think you can ignore the huge leap in government spending that has taken place during the first two years of Obama's term.
Update A reader asks for a version that shows spending trends. Chart below:
I initially added the dotted line to show the 2007 trend. But that didn't seem quite fair; arguably, that's a one year blip. So I used the trend of Bush's previous years to create the broken line trending upward; as you can see, there's astill a sizeable uptick, much larger than previous recessions.
Shouldn't we adjust the revenue growth for the recession? No, because I'm not making an argument about the cause--indeed, I specifically said that this should not be taken to argue that Obama/Democrats have increased spending all by themselves. Obviously, some of this is automatic stabilizers and so forth. But a lot of it is also discretionary, and given the way that many of those funds were used to target pre-existing Democratic priorities, Republicans have a right to argue that this can't all be simply written up to the recession.
But adjudicating those arguments about what spending should have been done, and who should be blamed for what, is not the purpose of this post. My purpose was simply to argue against the notion that the current deficit is overwhelmingly due to collapsing tax revenues. Any way you look at it, there's a big jump on the spending side.