Thursday, November 01, 2012

Why I'm For Obama, Part 2: The Deficit

One of the hot-button issues in the election is the deficit.  Republicans have been lambasting Obama and the Democrats over the size of the deficit.  As is always the case, the truth is buried under sound bites, inflamed rhetoric, and complete falsehoods.  Two years ago, during the mid-term elections, it was also an issue, and I did my own study of the deficit.  I wanted to strip away all the hype and figure out what was really going on, how bad the deficit really was, how it got that way, and how to turn it around.  I ignored political grandstanding as much as possible and focused on hard facts.  Then I wrote a blog post about my findings.  It turned out to be fairly long, wonky, and full of numbers.  But the key points were these:
- Federal expenditures have averaged around 20% of the country's GDP over the past 60 years or so.  Revenues have usually been a notch or two lower, meaning we usually have run a deficit.
- When President Bush took office, we had a balanced budget, with a surplus of $153B.  The budget and revenues were 21.2% of the GDP, slightly higher than the long-term norm.
- When President Bush left office, the figures were way out of kilter.  Revenues had shrunk to 13.5% of  GDP while expenditures had risen to 24.7%.  In dollar terms, this resulted in a deficit of $1.4 trillion, which was only $400B less than the entire federal budget of eight years previous.
- Obama's budget for 2010 was slightly improved: expenditures of 25.1% of GDP, revenues of 17.4%, and a deficit of $1.17T.

Numbers tell only part of the story.  The huge imbalances of the Bush years resulted from several factors: the Bush tax cuts of 2001 and 2003, the Medicare prescription drug benefit, two wars, and fallout from the financial crisis (reductions in tax incomes, increases in social safety net expenditures, and comparatively minor expenditures from the stimulus and bailout).  Obama inherited all of those factors as they were getting worse.  Over the past couple of years, though, one war has ended and the second is winding down, the improving economy is reducing requirements for social safety net expenditures, and the stimulus and bailout are over.  I would have expected the projected budget deficit come down, and it has, but not enough.

Two years after my original blog post, both parties are still locked in a vicious dogfight over how to improve the economy and reduce the deficit.  The result is that no clear path has emerged.  Both sides voted for a "poison pill" budget that mandated massive cuts if Congress and the President were unable to agree on a more politically-acceptable solution.  Of course they weren't, so now we're facing the so-called fiscal cliff, in which spending cuts (split evenly between defense and social spending) and tax increases automatically kick in on January 1, 2013.  It's hard to find numbers I can believe in, as they're all over the board, but the Congressional Budget Office estimates that the deficit would be reduced by about $487B (to about $650B) in 2013 if the "fiscal cliff" is implemented.

There is much wailing and gnashing of teeth on both sides about the impact these spending cuts and tax increases would have, and rightly so.  However painful they are, though, they're nowhere near enough. To get to a balanced budget will require much, much more in both spending cuts and revenue increases.  For example, the current GDP is about $15.8T.  The federal government's historical average of 20% of GDP means its revenues and expenditures should be $3.16T.  To get to that level would require spending cuts of $640B and revenue increases of $660B.  That's a lot of cuts and a lot of tax increases. Implementing them would be extremely painful, even over a period of years, and that's if our frickin' politicians in Washington will quit their irresponsible partisan war and get to work.

The challenges are huge:
- Mandatory spending programs, including Social Security, Medicare, Medicaid, interest on the national debt, and others) take up about two thirds of the government's spending and it's growing.  Congress must agree on reforms to make Social Security sustainable, rein in costs on Medicare and Medicaid, and  ensure the long-term survivability of the programs.  That means significantly reducing benefits and costs.
- Discretionary spending takes up about a third of the federal spending.  Over half of that goes for defense.  Spending for social programs is where the Republicans are targeting their cuts while increasing spending on defense.  However, if we completely eliminated all discretionary spending (education, roads, Hurricane Sandy assistance, the FAA, CIA, health, and so on) while keeping defense steady, we'd still run a half-trillion dollar deficit.  Which means that defense has to be cut as well.  Significantly.

All of this is a very long-winded (sorry) way of laying out the deficit problem.  So why do I say Obama will do a better job of reducing it than Romney will?  Because Obama has already shown himself to be a pragmatic deal-maker.  In budget talks with Republican leaders in 2011, Obama gave them 90% of what they wanted.  The Republicans, led by Paul Ryan, killed the deal by adamantly refusing to consider any sort of tax increase.  On the contrary, they want to cut taxes further, which really just fuels the deficit fire.  As I noted above, the only way to get the deficit down is through an equal measure of spending cuts and revenue increases.  Obama is ready to do it.  The Republicans won't.

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