“Because of the policies that we’ve put in place, our deficit has fallen faster than at any point since the demobilization after World War II, and should continue to decline relative to GDP [gross domestic product] over the 10-year budget forecast.”
– Treasury Secretary Jack Lew, speech before the Economic Club of Washington, Sept. 17, 2013
“The gap between federal spending and revenues would widen steadily after 2015. By 2038, under our extended baseline, the deficit would be 6.5 percent of GDP, and federal debt held by the public would be 100 percent of GDP even before we account for the economic effects of that increase in debt. That would be more than any year except 1945 and 1946.”
– Congressional Budget Office director Douglas Elmendorf, news conference on Capitol Hill regarding the long-term budget outlook, Sept. 17
(This column has been updated)
These two statements, spoken within minutes of each other in different parts of the nation’s capital on Tuesday, illustrate how slippery budget numbers can be.
Lew, during a speech mostly about the looming debt-ceiling confrontation, patted the administration on the back, talking about the here and now. But Elmendorf looked ahead, beyond the 10-year budget forecast cited by Lew, and foresaw little but danger regarding the debt. Interestingly, both statements start or end with World War II.
Let’s take a closer look at Lew’s statement.
First of all, one reason why the deficit appears to be falling rapidly is because it soared to great heights during the Great Recession. Because of emergency actions taken by President George W. Bush at the end of his term and President Obama at the beginning of his term, it’s hard to draw a bright line between the administrations. Thus different people might disagree about how large a deficit Obama inherited or helped create.
A Treasury official said that Lew’s statement is correct because in fiscal year 2009, the deficit as a share of the gross domestic product had risen to 10.1 percent. For 2012, the share was 7 percent, so that means a decrease of 3.1 percentage points over that three-year period. Hence, in Treasury’s formula, no other three-year period has a decrease as large until you get back to 1949, when the deficit as percentage of GDP had fallen from 7.2 percent in 1946 to a small surplus that year.
Regular readers know that The Fact Checker is often wary of raw numbers. Context is important. But in this case, the numbers have already been adjusted to account for the size of the economy, so in that sense it is fair to compare sets of years decades apart. You end up with odd and not especially useful results if you go a step further, such as taking these adjusted numbers and determining the percentage of the drop over the years.
In any case, both situations — World War II and the Great Recession — were unusual cases that led to a large spike in deficits. Given that the deficits soared because of a temporary situation, it also makes sense that they would rapidly decline. At the end of this fiscal year, the deficit as a percentage of GDP is expected to shrink to about four percent — though that is still higher than the year before Obama took office.
“We don’t dispute that day-one, deficits were very large — far larger than they were a year prior to that, as a result of historical events,” said the Treasury official. “But the measure of achievement from that point still seems to be best measured by how much progress we’ve made as a share of the economy from that point, which is what the Secretary did.”
Still, Lew attributing the decline to “the policies that we’ve put in place” is a bit like the rooster congratulating himself for the sun coming up every morning. In making this link, he goes further than President Obama, who made a similar statement about the decline in deficits over the summer that, in a rare fact checker dispute, PolitiFact deemed correct and FactCheck.org said was misleading.
Just as much of the rise in the deficit in the early part of the administration can be attributed to recession, the decline also stems from the recovery, though it has been painfully sluggish. There is an endless debate among economists about whether Obama’s policies helped or hindered the recovery; The Fact Checker takes no position on the matter, except to note that most studies found at least a modest, positive effect from Obama’s stimulus.
Moreover, the deficit has also fallen because, especially after the Republicans took control of the House of Representatives in 2010, Congress rejected the much higher spending levels that were proposed by the president. The administration has also objected to the sequester that sliced budgets across the board and thus has slashed even more spending. So it hardly seems correct to suggest, as Lew does, that all of the deficit reduction stems from the administration’s policies.
Meanwhile, Elmendorf made clear in his testimony Tuesday that the administration and Congress have been cutting the wrong kind of spending — primarily the increasingly smaller discretionary side of the budget. The mandatory spending side of the budget, such as health care and Social Security, has barely been nicked, except (in the case of Medicare) to help fund the Affordable Care Act. Moreover, the administration, with Congress, made permanent virtually all of the Bush-era tax cuts, which Elmendorf said significantly worsened the long-term budget picture.
In a recent presentation (see slide 3), Elmendorf showed that the long-term projection for debt as a percentage of GDP now is not much different than it was two years ago, despite extensive budget fights that supposedly slashed nearly $3 trillion in spending over the next 10 years. That’s because the tax deal earlier this year wiped out much of those savings, according to CBO’s accounting. So, the debt as a percentage of the economy could rise to 100 percent in a quarter century, up from 73 percent today, he said.
In other words, though in the short term the deficit has declined as a percentage of the economy, in the long term projections have not gotten better — indeed, have gotten worse — during the president’s term in office.
The Treasury official pointed us to this statement in Lew’s speech about the long-term challenge:
“Now, the President is willing to negotiate over the future direction of fiscal policy. That is why he proposed a budget that reflects the difficult choices he believes we need to make as a country. Within that budget, the President included reforms to entitlement programs and the tax system that would spur economic growth and cut our deficit. And he has made it absolutely clear that he is ready to sit down with Republicans and Democrats to find common ground.”
The Pinocchio Test
Both statements by Lew and Elmendorf mention the spike in the debt, as a percentage of the economy, after World War II. But Elmendorf’s reference is more troubling, because he is talking about debt that built up over the decades, not debt that was required for a short-term emergency, such as war or a recession. Such a debt load would be extraordinarily difficult to reduce, which is why the CBO director is raising a warning flag now.
Lew’s celebratory statistic about the short-term deficit decline is much like a magician’s trick. It distracts attention from the more troubling news about the debt on the horizon. Thus he earns Pinocchios.
Check out our candidate Pinocchio Tracker