Wednesday, February 3, 2010

Or This! Obama deficits not Bush's fault Robb

The Obama administration undoubtedly wants the budget message to be all the good things it wants to do for the American people, except those who make the mistake of earning too much money.
There's a second stimulus, rechristened a jobs program. Health care reform, repositioned as an attack on the insurance industry's dirty deeds. New middle-class tax breaks. More spending on education. Lots more spending on infrastructure and clean energy.  The budget is intended to position the Democratic Party as the friend of the middle-class. But the message is blotted out by all the red ink.  Obama likes to depict himself as a deficit victim. He inherited a huge deficit and a deep recession. Not his fault.
Certainly the Republicans during the Bush years were fiscally irresponsible. But within historical bounds. The deficits in Obama's budget are beyond historical bounds and are his alone.  Even with Bush's tax cuts, federal revenues in 2007 were at the average as a percentage of GDP, 18.5 percent, going back to 1960. The deficit was just 1.2 percent of GDP, historically on the low side. Accumulated federal debt was 36 percent of GDP.
Then the recession hit. From 2008 to 2009, federal spending increased 18 percent. This was a budget year that straddled the Bush and Obama presidencies. But the spending increase was driven by anti-recession measures, predominately the Bush stimulus and bailouts.
Obama supported these measures. In fact, his complaint about the Bush stimulus was that it was too small.  This raises a question of political ontology: If Obama agreed with Bush, is it still just Bush's fault?  The Bush tax cuts expire this year. Except for the legacy costs of the Iraq war, Obama is free to recommend changing anything Bush did. The deficits he recommends from 2011 on are purely his own. And they are massive, and driven by spending.  Obama purposes that the federal government spend over 25 percent of GDP in 2011, compared to a historical average of around 20.5 percent. He justifies this as necessary to continue to fight the recession.

Obama, however, projects that the recession will be fully over in 2011 and robust growth under way. Yet he proposes that federal spending continue to be nearly 24 percent of GDP through 2020. In other words, rather than wind down the additional recession spending after recovery, Obama is proposing that it simply become a new, higher base.
After the World War II debt was reduced, accumulated federal debt never exceeded 50 percent of GDP until 2009, when it reached 53 percent. Under Obama's recommendations it would grow to 77 percent by 2020.
If Obama were to recommend a path to return spending to its historical share of economic output, in 2020 the deficit would be just $255 billion, about what the federal government spends each year on large capital projects, and just 1 percent of GDP. In other words, not a problem. And federal spending would have still increased by more than 4 percent a year since 2008.  Instead, Obama recommends a 2020 deficit of over $1 trillion and a troubling 4.2 percent of GDP.
Rather than recommend deficit reducing measures himself, Obama wants to turn the job over to a bipartisan commission. Republicans suspect a rat, an attempt to get them to support even larger tax increases than Obama is already proposing.
They are right. Under Obama's budget, revenues are already projected to be 19.6 percent of GDP, much higher than the historical average. Yet he still proposes trillion dollar deficits.  The problem is spending. Obama wants to do too much of it.

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