The Source of the Deficit

The New York Times has a pretty informative editorial today about where our deficit comes from.  When Bill Clinton left office, the budget was running a surplus, and surpluses were predicted to get bigger.  Under Bush, the budget fell into deficit, and the deficit grew as the Administration went along.  There were four different drivers of this shift, one of which isn't a long-term problem, two of which (TAX CUTS and RECESSION) don't have to be long term problems, and one of which is a long-term problem.

The four are, 1) The wars in Iraq and Afghanistan, 2) The Bush tax cuts, 3) Two different recessions, and 4) Exploding health care costs.

The war in Afghanistan, at least, was pretty much accepted by both Democrats and Republicans as a justified response to the 9/11 attacks.  The war in Iraq was not, and was sold on false pretenses, but that discussion is irrelevant to the budget debate.  While wars are generally expensive (and there are no exception), they're not unaffordable.  Sooner or later, they'll wind down, which in turn erases them from the books.  So they're really not a drag on the long-term budget picture.

The Bush tax cuts, on the other hand, were neither necessary nor unaffordable.  They were initially sold as a way to spend the surplus accumulated during the Clinton years.  Then, when the tech bubble burst at the beginning of the Bush Administration, they were sold as a way to stimulate the economy back to growth (a very Keynesian prescription, given that the Fed had plenty of traction to lower interest rates in the economy). On the surface, those tax cuts looked affordable, simply because the CBO scored them as if they would expire on schedule instead of being extended indefinitely.  Letting them expire in 2012, as they're scheduled to do, roughly cuts the structural deficit in half.  The issue is convincing anti-tax nuts in Congress to let that happen.

Recessions were another major part.  By definition, recessions have significant adverse effects on budget conditions.  They cut tax receipts (as GDP falls), but hike auto-stabilization spending through unemployment benefits and Medicaid, creating bigger budget deficits.  It's this factor that is primarily responsible for the big deficits during the Obama administration.  The size of government, contrary to BS claims to the contrary, has not grown under Obama.  But the economy has shrank.  The reason this doesn't have to be a long-term issue, though, is that the government COULD still take steps to fight the downturn.  Fiscal policy to stimulate the economy and get it back to full employment and jump-start a self-sustaining recovery would fill a significant part of the budget gap that currently exists as a result of the depressed economy.  Sure, that would hike the deficit in the short-term, but the longer the economy stays depressed, the bigger the long-term debt picture will be anyway, so you end up with a healthier budget picture, despite more spending by the government, since that spending is smaller as a portion of the bigger economy.

The last major part of the budget picture is health-care spending.  For a long time, the rate of growth of health care spending has been faster than the rate of growth of the economy.  This is unsustainable, and needs to be addressed.  We'll see if Congress is willing to address this issue, but it's the biggest and hardest to resolve issue plaguing our budget.