Doing the math on Obama’s deficits, cont’d
Keith Hennessey, who led the National Economics Council in the final years of George W. Bush’s presidency, thinks my analysis of the deficits caused by Obama’s presidency should have included two further items: The likely extension of most of the Bush tax cuts, and everything else.
The Bush tax cuts were far and away the most difficult question we faced when preparing the analysis of Obama’s deficits. As I wrote in the original column, the underlying idea was to construct a comprehensive database of every policy Obama himself had passed. That meant creating a baseline that held everything that predated Obama constant. That’s easy enough to do for almost any policy you can think of. Any policy, that is, but the Bush tax cuts.
The problem is that the Bush tax cuts predate Obama but were set to expire on his watch. So is extending the status quo a new policy decision? Or is it sticking to the baseline, and thus budgetarily costless?
I chose to make it a new policy decision. In 2010, Obama chose to extend the Bush tax cuts for two years. Ignoring the $620 billion in debt that that decision incurred was, I thought, unacceptable. But Hennessey wants me to go further: He wants me to assume the extension of most of the Bush tax cuts through 2017.
The problem, however, is that no one really knows what will happen in 2012. Will the Bush tax cuts be fully extended? Partially extended? Will Republicans oppose anything but a full extension, and then Obama will use their opposition as an excuse to let them fully expire? Will they be used as an excuse to fast-track tax reform and the tax code will look entirely different beginning in 2013? Will Obama lose the election, and support a two-month patch so the Bush tax cuts are President Romney’s problem?
And if I were to begin adding Obama’s policy preferences to the baseline, where would I stop? Obama has also supported deficit-reduction packages that would cut as much as $4 trillion in debt. Since no such package has passed, I don’t think I can give Obama credit for reducing the deficit by $4 trillion, even though that is what he says he intends to do, and even though I think there’s a good chance that a significant deficit-reduction deal will be passed into law if he wins a second term.
Which is why the Bush tax cuts’ post-2012 fate doesn’t show up on the graph. But as I wrote in the accompanying column, “if Obama follows through on his promise to extend all the cuts for income under $250,000 in 2013, it will add trillions more to the deficit.”
Hennessey’s other point is that Obama deserves the blame for every dollar of debt that was amassed under his presidency, as once you become president, the federal government is yours to run. That’s a fair argument, though it seems a little self-serving: Obama entered office immediately after the administration Hennessey worked for pushed revenues far beneath spending and failed to effectively regulate the financial sector or the housing sector. In the quarter before Obama entered office, the economy shrank at an annualized rate of nine percent. Two weeks before he was inaugurated — but before Bush had left office — the Congressional Budget Office released a report forecasting a $1.2 trillion deficit for 2009. That was all due to policies and conditions predating Obama.
It has been convenient for the Republican Party to blame the resulting deficits on the Obama administration. But this is a bit peculiar: If a house catches fire and damage is done in the time it takes time to put out the blaze, should the blame go to the people fighting the fire or the people who allowed the fire to begin in the first place? The latter, I think. Which is why, in my column, I was trying to isolate the fires Obama’s administration had started.
But perhaps the more generous way to phrase Hennessey’s point is that Obama should have turned immediately to reduce the 2010 deficit. But that would have been an economic disaster, as Hennessey knows. So perhaps the argument is that he should have turned more quickly to long-term deficit reduction. The Obama administration could have spent, say, 2010 pursuing a long-term deficit-reduction package rather than financial regulation.
One answer is that the White House has, through 2011, tried to come to some sort of deficit-reduction deal with the Republicans, but has been unable to get them to accept higher taxes as part of a package. Perhaps you think they could have tried harder, or should have accepted one of the proposals they rejected. That’s a worthwhile argument to have, but it’s not really one I could include in the baseline.
But there’s also a larger point here that will figure more fully into next week’s column: This discussion implicitly suggests that deficits are, always and everywhere, a bad thing. They’re not. Indeed, there’s a good argument that Obama should have run larger deficits over the last few years, and that he needs to be careful not to cut them too quickly over the next few years.
That doesn’t obviate the very real need for more medium and long-term deficit reduction. But just as it would be irresponsible to let deficits continue to rise over the next decade, it would have been irresponsible to let them fall over the last three years. More on that later, however.