When President Obama took office in 2009 at the height of the recession, the annual budget deficit came in at 10.1 percent of gross domestic product -- a level not seen since the end of World War II. In the five years since, the budget deficit has been sliced more than half. New figures in Obama's just-released budget put it at only 3.7 percent of GDP in 2014. Explore 60 years of deficits - and the occasional surplus - in the interactive chart below. As the chart shows, the recent reduction of the deficit has come primarily due to spending cuts instead of revenue increases. Spending has shrunk 4.1 percentage points from 2009 to today, while revenue has grown only 2.2 percentage points in the same period. To put it another way, there have been nearly $2 in spending cuts for every $1 in revenue increases. On the surface, it would appear that Republicans won the budget wars. But you wouldn't get that impression listening to the rhetoric coming from some quarters of the Republican base after the recent debt-ceiling fights.
The federal government's 2013 fiscal year ended Sept. 30, though most of us were so busy focusing on the government shutdown that accompanied the new fiscal year that there wasn't much time to reflect on the year that had passed.
Now the Treasury and Office of Management and Budget is out with the final budget results. Surprise! The deficit fell quite a bit in 2013. The federal government took in $680 billion less revenue than it spent, or about 4.1 percent of gross domestic product. In 2012, those numbers were $1.087 trillion and 6.8 percent of GDP. That means the deficit fell a whopping 37 percent in one year.
There's a far better case right now for being an infrastructure hawk than a deficit hawk.
Deficit hawks tend to have two worries. The first is a practical concern about interest rates. Too much government borrowing can, in a healthy economy, begin to "crowd out" private borrowing. That means interest rates rise and the economy slows.
It's time to stop celebrating last week's Congressional Budget Office report. Our deficits aren't dropping because we're doing something right. They're dropping because we're doing everything wrong.
My initial piece on the CBO report led with the surprising news that the agency had knocked more than $600 billion off its projections for the deficit over the next decade. But as I wrote then, the deficit is following a weird path. It's not a gradual decline. It's not a temporary uptick as we spend to create jobs followed by a sharper decline as the economy recovers. It's a sharp decline followed by a gradual rise -- it looks a bit like a Nike Swoosh.
It looks like we've moved to talking about possible scandals just in time, because according to the Congressional Budget Office, the debt disaster that has obsessed the political class for the last three years is pretty much solved, at least for the next 10 years or so.
The last time the CBO estimated our future deficits was February-- just four short months ago. Back then, the CBO thought deficits were falling and health-care costs were slowing. Today, the CBO thinks deficits are falling even faster and health-care costs are slowing by even more.
In the Washington conversation, we often talk about austerity as something that other people are doing. Tight fiscal policy is undermining growth in all those other economies—Greece and Spain most dramatically, but also the rest of continental Europe and Britain—while we Americans have continued our profligate ways. Just Friday, Alan Simpson and Erskine Bowles were again offering a plan for the U.S. to finally get serious about its deficits and debt.
Earlier today I tweeted, "If we got education, health care and infrastructure right, a lot of our other economic problems would take care of themselves." Ted Glass spoke for many when he replied, "Is that all?"
It's a tall order, I admit. But Washington is spending all its time right now pursuing a "grand bargain" between the two parties, and that's an even taller, and perhaps even impossible, order.
This week marks the beginning of the U.S. budget season. On Tuesday, Rep. Paul Ryan presented the budget for House Republicans. Wednesday, Sen. Patty Murray will, for the first time since 2009, present a budget on behalf of Senate Democrats. In a few weeks, the Obama administration will publish its own budget. In honor of the season, Americans everywhere will wear traditional budget-season hats and eat the customary budget-season meals, which include, of course, a rich dessert that we assume will be offset by future weight loss.
At the end of this Center for Budget and Policy Priorities paper is a terribly sad note: "This represents the final update of an analysis that we first produced in 2009 and have updated once or twice annually since." That may sound dry, but the analysis to which they're referring is the center's famed "parfait chart," showing which policies have contributed to our large current budget deficit and debt levels. For budget nerds, this is like "Arrested Development" getting canceled (and not getting brought back, at least not yet). But one last hurrah is better than none. Without further ado, the final parfait chart (for debt, which gives a broader historical sweep):
How much debt can America handle? The question is one of the most fundamental the nation faces, and the answer should determine how the United States handles the delicate task of reducing budget deficits without walloping economic growth.
A new paper argues that the number that should make us nervous is 80. That is, that 80 percent public debt to GDP ratio is the point at which a nation becomes vulnerable to tipping points on debt. The idea is that once a nation has debt above that level, it becomes vulnerable to the kind of self-reinforcing vicious cycles that have put nations into a bad position in the past. High debt levels lead investors to view the country's bonds as less desirable, so they demand higher interest rates. Higher interest rates make the country's debt burden more onerous, and so investors sell off bonds all the more. When that cycle takes hold in a truly vicious way, the only endings are high inflation or a default.
Jim Gilmore is a conservative Republican, a former governor in a purple state and a man who has developed, in the last several years, a deep and emotional concern over the condition of the U.S. economy. And he's frustrated because, he says, Republicans in Washington seem to care more about cutting federal spending than sowing the seeds of rapid economic growth.
Back in the 1990s, we knew why we feared deficits. They raised interest rates and "crowded out" private borrowing. This wasn't an abstract concern. In 1991, the interest rate on 10-year Treasurys was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth.
In 2011 and 2012, the White House was open to raising the Medicare eligibility age from 65 to 67. They were open to this for two main reasons.
First, they figured that the Affordable Care Act would protect most of the neediest seniors and that employer coverage would protect many of the others, and so the change was, relative to the available options, fairly progressive.
There has been a bit of a feud running the last few days between MSNBC host Joe Scarborough and New York Times columnist Paul Krugman over whether deficits and debt are a big threat to the United States, an imminent, pressing problem that must be addressed right now.
Their dispute is reflective of a bigger divide: On one side is the standard Washington wise man/centrist pundit view of the world, embodied by Scarborough and some of the people he cites, like former Joint Chiefs chair Mike Mullen and Richard Haass of the Council on Foreign Relations. On the other are a wide variety of economists—avowed liberals like Krugman, but also the not-particularly-ideological analysts at places like the Federal Reserve, major bank economics shops, and business forecasting firms, who generally see wisdom in reducing the deficit over time but also see big risks to the economy if the effort moves to fast, and not much reason to fear an imminent debt crisis.
Here's a secret: For all the sound and fury, Washington's actually making real progress on debt.
Let's do some quick math. Start the clock -- and the deficit projections -- on Jan. 1, 2011. Congress cut expected spending by $585 billion during the 2011 appropriations process. It cut another $860 billion as part of the resolution to the 2011 debt-ceiling standoff. And it added another $1 trillion in spending cuts as part of the sequester. Then it raised $600 billion in taxes in the fiscal cliff deal.
Markets are funny. Sometimes basic intuition tells you a lot: If there is a recession, the stock market almost certainly falls, for example; if there is high inflation, bond yields rise as investors demand compensation.
But sometimes, basic intuition is all wrong. This is one of those times. On a couple of key questions around U.S. policy, the conversation in Washington is getting two things about markets particularly wrong, clouding the debate on some of the most important policy debates of our time.
It's official. The United States is a "profligate" nation, according to IMF staff research that examines which countries respond to increases in public debt by trimming their fiscal sails. And that makes the nation surprisingly rare in the developed world.
The finding stems from efforts at the International Monetary Fund to take a long-term view of public spending, revenue, deficits and debt patching together databases going back as far as 1800 and applying statistical tests to see how they interact. According to the authors, it's perhaps the most extensive effort yet to apply "state of the art" statistical methods, developed by economist Henning Bohn, to measure the sustainability of public debt over a broad set of countries through the decades.
From the Congressional Budget Office's hot new white paper, "Options for Deficit Reduction":
That's all of the federal government's spending in three graphs. The top graph is health care, including Medicare, Medicaid and the Affordable Care Act. The middle graph is Social Security. And then there's literally everything else: Defense, education, infrastructure, food safety, R&D, farm subsidies, the FBI, etc.
There’s a reason Bill Clinton is on the stage tonight. When he was president, America enjoyed a booming economy and surpluses (here are some charts). Since he left the White House, things haven’t been quite as good.
But the story of why they haven’t been quite as good is more complicated than “Clinton isn’t around now.” Here are three of the best analyses of what’s happened to the federal budget since 2001. I’ve included the key paragraph and chart from each of them.
The Republican budget might keep President Obama’s cuts to Medicare. But a Romney administration wouldn’t.
Lanhee Chen, the campaign’s policy director, left no room for doubt in his statement: “A Romney-Ryan Administration will restore the funding to Medicare, ensure that no changes are made to the program for those 55 or older, and implement the reforms that they have proposed to strengthen it for future generations.”
The campaign trail can be a lonely place, so Mitt Romney frequently invites friends to accompany him. New Jersey Gov. Chris Christie is an occasional companion. So is Virginia Gov. Bob McDonnell. But more often, Romney brings a large clock.
Romney’s people made the clock themselves. It has two giant flat-screen televisions pushed side by side. It’s surrounded by a green foam sign. And it’s hooked to two computers feeding it a live count of America’s rising debt burden, which stands well above $15 trillion. The clock represents President Obama’s economic failures. It’s there so Romney can point to it and tell the crowd that if he’s elected, he’ll “do a better job slowing down that clock.” But if you’re a deficit-obsessed voter, the clock doesn’t answer the key question: How much has Obama added to the debt, anyway?
The Congressional Budget Office released its new budget outlook this morning, and it says what it always says: Deficits are huge, but projected to shrink dramatically in the next few years. Congress could sit back, do nothing, and deficits would fall from 7 percent of GDP to 1.5 percent of GDP.
But that would mean Congress allows the Bush tax cuts to expire, the alternative minimum tax to return, the 1997 Balanced Budget Act to cut Medicare’s payments to doctors by about 30 percent, and the Budget Control Act’s trigger to make $1.2 trillion in spending cuts. If Congress moves to block those changes, however, deficits will remain huge. How huge? About 5.4 percent of GDP, guesses the CBO. So that’s the basic choice facing U.S. policymakers: Huge tax increases and spending cuts, or huge deficits.
The debt ceiling increase formally requested by the White House today is the third the Budget Control Act allows. The first occurred when the law was signed. The second went into effect in September when Congress failed to disapprove the request. Today’s $1.2 trillion request is the third...and largest...the law allows.
Paul Krugman is frustrated that deficit hawks never seem to pay for incorrect predictions. The past few years have been unkind to those who swore America’s deficit spending would lead to a bond crisis. And yet the reputations of those who have been predicting exactly that haven’t suffered.
But perhaps it’s been ever thus. In “The New Deal,” Michael Hiltzik tells the story of Lewis Williams Douglas, FDR’s first budget director. Douglas was a deficit hawk during the depths of the recession. He demanded that Roosevelt cut government spending by 25 percent. He was quickly proven wrong. And yet he wasn’t laughed out of public life. He didn’t have to recant his beliefs. Here’s Hiltzik on Douglas’s post-administration career:
On first read, I thought Jared Bernstein’s essay rethinking debt was a bit simplistic. There’s nothing really new there. Which, on further reflection, is exactly the point. We don’t need a new understanding of debt. We just need an understanding of debt.
Bernstein doesn’t put it quite like this, but the basic problem with Washington’s conversation over debt is we’ve taken a fiscal tool and recast it as a moral sin. Head over to Mitt Romney’s Web site and look at what it says across the top: “We have a moral responsibility not to spend more than we take in.” Really? Why? And over what time frame?
Perhaps it’s worth noting that just as Americans aren’t happy with German policymakers right now, Germans aren’t too impressed by America’s policymakers. This was a common theme in my conversations with German policymakers: The financial crisis was largely America’s fault. The debt-ceiling debacle convinced the world our political system has gone nuts. Our long-term deficits are appalling. We’re too focused on stimulus. The Federal Reserve is pumping so much liquidity into the market that we’re almost assured future bubbles or higher inflation. We’re obsessed with short-term problems and have lost sight of our long-term challenges.
Germans think, in other words, that we’re too much like us, and not enough like them. Which is sort of true. But at the same time, the Germans are too much like Germans and too little like, well, us.