< Up Against the Wall Street Journal W $ J How I Learned to Stop Worrying and Love the Deficit By John Miller The Pelosi-Obama Deficits ou would have thought the federal Ybudget deficit had morphed into [C]urrent U.S. fiscal policy is “borrow and spend” on a hyperlink. Dr. Strangelove’s doomsday machine deficit for 2009 will be “only” $1.58 trillion … . But the Obama fiscalThe … plan from the howling that followed the envisions $9 trillion in new borrowing over the next decade. publication of the Congressional We’ve never fretted over budget deficits, at least if they finance tax cuts to Budget OfficeCBO ( ) projections in August. The Wall Street Journal editors promote growth or spending to win a war. But these deficit estimates are were happy to join in despite assuring driven entirely by more domestic spending and already assume huge new readers that they are not deficit-pho- tax increases. bic. [T]he White House still hasn’t ruled out another fiscal stimulus. … But the truth is, government spend- Obamanomics has turned into an unprecedented experiment in runaway ing and the budget deficit it engen- government with no plan to pay for it, save, perhaps, for a big future toll on dered are what stood between us and the middle class such as a value-added tax. an economic doomsday that would —from an op-ed in the Wall Street Journal have rivaled the Great Depression of , 9/26/09 the 1930s. In that context, the Obama budget deficits are neither all that big how much the collapsing economy nor all that bad, although they sure at its “potential GDP.” Standardized def- contributed to the deficit. Big govern- could have been better had the spend- icit figures indicate that the 2009 bud- ment bashers like the Journal editors ing priorities been more progressive. get is highly stimulative but hardly would have you believe that the entire And even larger deficits could have— disproportionate to the economic budget deficit was brought on by reck- and still could—do more to alleviate emergency it confronted. In 2009 the less government spending. the economic suffering that continues cyclically adjusted deficit will reach That is hardly the case. The collaps- unabated even as the economy begins 8.6% of potential GDP, and then shrink ing economy added more to the defi- to stabilize. to 3.4% by 2011, according to CBO es- cit from 2007 to 2009 than any other timates. The previous high was 4.7% in factor. As economic activity dried up, How Big Is It? 1986 (with data back to 1962), in the personal and corporate income tax Even after correcting for inflation, midst of the “borrow and squander” revenues plummeted: this year gov- $1.58 trillion is a record federal budget Reagan years when the only emergen- ernment revenues will drop to 14.9% deficit. But this eye-popping number cies facing the nation were the desire of GDP, their lowest level since 1950. needs to be seen in context. of the rich for a tax cut and the drive to Plus, the crashing economy automati- A trillion and a half dollar deficit expand cold-war military spending. cally pushed government spending on will equal 11.2% of Gross Domestic Under George W. Bush, tax cutter to unemployment insurance and food Product (GDP) for 2009, according to the rich extraordinaire, the cyclically stamps up, further widening the defi- CBO estimates. That too is a record for adjusted deficit reached 3.1% in 2004, cit. Even the financial-sector bailout “peacetime” deficits. The Reagan defi- the near equal of the projected 2011 and the Obama stimulus package tak- cits in their worst year reached 6% of figure. en together did less to swell the deficit GDP. During World War II, however, Still, any way you look at it, these than the economic collapse did. military spending pushed the federal deficits remain large, if nowhere near To control for the effect of the busi- deficit to qualitatively different levels, as large as the critics suggest. And they ness cycle on the budget deficit, econ- reaching 31.3% of GDP and never will in fact add $9 trillion in the next omists look at the so-called standard- dropping below 14.5% during the war decade to the national debt, the cu- ized, or cyclically adjusted, deficit—the years 1942 to 1945. mulative amount of money the gov- deficit that would occur if the econo- Whatever its size, before pinning ernment will have borrowed to finance my was always operating at the peak the 2009 deficit on runaway govern- its annual deficits. of the business cycle, in other words, ment spending, it’s important to assess That is another frightening number, 10 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2009 NOVEMBER/DECEMBER 2009 l DOLLARS & SENSE l 11 < Up Against the Wall Street Journal but it too needs to be seen in context. gy would be followed by a depression ance) will average 12.8% of GDP over For instance, publicly held federal-gov- that would impose far greater costs the next ten years, 1.6 percentage ernment debt will be 53.8% of GDP than escalating government debt. points more than in 2008. Even that this year (2009) and will reach 67.8% of jump in what is, after all, already-obli- GDP in 2019, according to CBO projec- Domestic Spending Gone Wild? gated spending will account for just tions. This year’s number is not so dif- The Journal’s editors are correct that it two-fifths of the federal deficits that ferent from the 49.4% figure in 1993, is not the size of the deficit that is wor- the CBO projects for the next ten years. rung up after twelve years of risome, but its content—the spending That is hardly domestic spending gone Republican tax cutting. The Wall Street and taxing policies that brought it wild. Journal’s editors endorsed those tax about. But on that count they really cuts, so it must not be a national debt should not be complaining, because it The True Test in the range of 50% of GDP per se that was the tax cuts and military spending Obama administration policies might worries them. The 2019 number would they favor that played a decisive role in not have been the chief cause of the be the largest ratio of debt to national pushing the federal budget out of the 2009 deficit or the $2.3 trillion budget output since 1952, but still not in the black and into the red. swing from black to red ink over this same ballpark as the 120% figure at When the Bush administration took decade, nor will they commission run- the end of World War II. office in 2001, the CBO projected the away domestic spending as the editors Absent the stimulus, the federal federal government would run a bud- allege. government would face yet larger defi- get surplus of $710 billion in FY 2009. But that alone does not make the cits as the economy and federal tax The CBO now projects a $1.6 trillion president’s policies successful. The true revenues fell further. And unlike World budget deficit. The Economic Policy test of any deficit spending policy is War II spending that sparked a 20-year Institute found that the bad economy whether it makes people better off. economic boom, a do-nothing strate- (slow growth and then the crisis) and The policies endorsed by the editors Bush administration tax and spending have failed that test miserably. Worse policies (from the 2001 and 2003 tax yet, they saddled us with large deficits cuts, to spending on Iraq and that now block the very spending pro- Afghanistan, to Medicare prescription posals that might pass that test. drug coverage) each caused about Whether it is spending for universal 42% of that $2.3 trillion budget swing. health care, green technology, infra- Following by quite a distance were the structure repair, or school renova- Obama stimulus package and the TARP tions—or help for those who have lost bailout, accounting for 7.6% and 7.7% their homes—the new refrain is that of the budget swing respectively. spending must not add one dime to Supplemental defense allocations for “the deficit.” the Iraq and Afghanistan wars ac- A second dose of deficit-financed counted for more of the increase in the stimulus spending, a notion the edi- deficit (9.3%) than either program (see tors dismiss out of hand, would create figure). jobs desperately needed as even offi- Nor do the CBO numbers justify the cial unemployment rates are likely re- editors’ claim that we are about to en- main at double-digit levels through ter a period of runaway government much of 2010. Economist Paul and deficits “driven entirely by more Krugman estimates that an additional domestic spending.” Discretionary do- $600 billion of stimulus would add just mestic spending (federal government $400 billion to the national debt a de- spending on education, housing, infra- cade from now, for more spending structure, and the like) will average would generate economic growth and 3.7% of GDP over the 2010 to 2019 tax revenues. period—no higher than in 2008, the Large and persistent budget defi- last year of the Bush administration. cits do present one problem to a pro- Mandatory domestic spending (includ- gressive agenda. Financing them wors- ing Social Security, Medicare, ens inequality. According to CBO Medicaid, and unemployment insur- estimates, interest payments will triple 12 l DOLLARS & SENSE l NOVEMBER/DECEMBER 2009 NOVEMBER/DECEMBER 2009 l DOLLARS & SENSE l 13 in absolute terms over the next decade and double relative to the size of the economy.