The Deficit Revisited - Overview

THE DEFICIT REVISITED

OVERVIEW

In this and subsequent posts, I revisit and update the series that I posted two years ago.  I am pleased to report that nothing that I have seen over the past two years has given me any reason to modify the main conclusions that I presented in that series of post and, if anything, some of the new material that has emerged since then has left me more confident in those conclusions.

I have updated some of the original material with more recent data and have added much new content.  As before, most of the analyses are based on data from original sources such as the Official Budget of the United States, the Bureau of Economic Analysis, the Treasury Department, the Congressional Budget Office, and the Organization for Economic Cooperation and Development (OECD).  I have provided detailed source information so that readers who are so inclined can check for themselves.

My analysis of deficits and the national debt will be limited to the years preceding 2009.  The great recession that began towards the end of 2008 has created an economic environment that is so different from previous years that it really needs to be addressed separately.  I will do this in a later post.

The posts that follow will provide the evidence to support the following conclusions:

We Are Not Over-taxed.

• In 1960, when Dwight Eisenhower was President and we had a balanced budget.  Taxes then amounted to 15.8% of Gross Domestic Product (GDP); in 2008 they were 13.0% of GDP - a loss of tax revenues equivalent to $400 billion in 2008.  The deficit that year was $642 billion

• Not only is our tax burden lower than it was 50 years ago, it is also significantly lower than in other developed countries.  The mean tax burden (local, state, and Federal) in OECD^[1] countries is 35% of GDP; for the US^[2] it is 30%.

Spending As Such is Not the Problem.

• Whether spending is excessive depends on what you think of the programs for which the money is spent.  If you view Medicare and Medicaid as misguided government intrusions into areas better left to the private sector then you will view spending for them as unnecessary and excessive.  If you think that agricultural subsidies to huge corporate farming operations are vital to the national wellfare, you will view those expenditures as a prudent allocation of resources.

• In 1960, Medicare and Medicaid did not exist.  Those two programs alone cost $643 billion in 2008.  Despite the fact that we have increased spending for those and many other programs, our tax bill in 2008 was nearly $400 billion lower than it would have been under Eisenhower’s tax policies.  (To put these numbers in perspective, the 2008 deficit was $642 billion.)

• Eliminating the deficit without raising taxes would require draconian cuts in services to the most vulnerable segments of the population.  It would also involve major cutbacks in programs and services that are taken for granted by middle- and upper-income Americans. 

• Tea Party enthusiasts don’t have a clue about the way in which their lives would be affected by the spending cuts they are clamoring for.  If they understood, you can rest assured that they would be considerably less enthusiastic about their spending cuts.

•  Programs like Food Stamps and Subsidized Housing are popular targets for right wing talk show hosts who love to spin yarns about outrageous abuses.  In reality, total spending for all of those programs amounts to 4% of federal spending.  Even if 25% of participants are committing fraud, we are looking at only 1% of the budget, hardly a promising place for deficit reduction.

The Deficit And Debt “Crises” Are Not The Result Of Irresponsible “Tax And Spend” Policies Of Liberal Democrats. 

• At the close of 2008, 75% of our national debt had been generated by the “borrow and spend” policies of just three Presidents - Ronald Reagan, George H.W. Bush, and George W. Bush.  The remaining 25% of the debt was accumulated by the 39 Presidents who preceded Ronald Reagan.

•  The dramatic surge in the 2009 deficit can be attributed to five events:

1. The recession  (27% of the deficit).  An analysis done by The Center for Budget and Policy Priorities (CBPP) has shown the recession to be the single largest cause of deficit spending.  Recessions deliver a double whammy to the federal budget.  They trigger large, automatic, increases in expenditures for safety net programs like unemployment insurance, Medicaid, and food stamps.  At the same time, they also result in a substantial drop in tax revenues.
2. Running close behind the recession are the Bush tax cuts (24% of the deficit)
3. The Wall Street bailouts (16% of the deficit).  (Signed into law by George W. Bush, by the way).
4. The economic stimulus^[3] (12% of the deficit).  This is the only part of the deficit that can be attributed to President Obama.  Most mainstream economists agree that the stimulus headed off a catastrophic economic catastrophe and more than paid for itself.
5. Two unfunded wars (12% of the deficit).

The Real Threats to Our Economic Future

• Rising health care costs - and we are not talking about publicly funded programs like Medicare and Medicaid.  Expenditures in employer-based, private sector health programs are rising faster than those in publicly funded programs.

• Our Inefficient health care system - We spend 18% of GDP on health care compared to 11% in OECD countries, and yet the United States lags behind those countries in virtually every measure of population health, from infant mortality to life expectancy.

• If our health care system were as cost effective as the systems in those “socialist” OECD countries, we would save 7% of GDP each year, equivalent to $1.0  trillion in 2008 (when the deficit was a mere $642 billion).

•  The US defense budget ($663 billion) is larger than the combined defense budgets of the 20 next largest countries ($654 billion).  Can we and should we continue to play the role of world super-power?

• Too Big to Fail Financial Institutions.  The fallout from the financial crisis goes far beyond the tax dollars used to rescue Wall Street banks from the results of their reckless and irresponsible financial speculation.  It must also include trillions of dollars in foreclosed homes, lost jobs, and lost tax revenues, not to mention the continuing provision of free money in the form of near-zero loans from the Treasury Department.  

• The same financial institutions that triggered the recession are now bigger than ever and are now “too big to jail” according to testimony by Attorney-general Eric Holder before the Senate Finance Committee on 3/6/2013.  Holder stated that the Justice Department is hesitant to initiate criminal cases against  some of the largest financial institutions because prosecution could seriously disrupt both the US and the World economies.  So the folks who made a killing by manipulating LIBOR rates and who knowingly laundered money for Iran and for the Mexican drug cartels no longer need to worry.

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^[1] Organization for Economic Cooperation and Development.  Member countries include Western Europe, the UK, Canada, Australia, and developed East Asian countries like South Korea and Japan.

^[2] After adjusting for the fact that the tax burden in OECD countries is higher because a much higher proportion of health care costs is born by government in those countries.

^[3] Otherwise known as the American Reinvestment and Recovery Act (ARRA) of 2009