A Dose of Reality

It’s time for a little dose of reality. We are daily bombarded with rants from both sides of the political spectrum as we try to sift through the information concerning how the deficit in this country got out of control. To have any sort of perspective on the problem we need to go back to 2001 when Bill Clinton was leaving office. At that time the Congressional Budget Office estimated that the US budget would actually run a surplus of some 800 billion dollars a year for the years 2009-2011. What has actually happened is that we are now running an annual deficit of some 1.2 Trillion dollars a year for those years. This difference in these two amounts is a 2 trillion dollar headache for the United States and one that the current crop of politicians on both sides are steadily proving themselves incapable of understanding, much less rectifying the situation. What happened? How could the Congressional Budget Office have been so far off in their estimate?


Republicans would have us believe that the Obama administration with its socialist tendencies and out of control spending habits has destroyed our economy. Democrats would have us believe that tax cuts for the richest Americans and lobbying efforts by the largest American corporations have decimated the ability of the US to raise revenue needed to pay our bills. As is usually the truth in politics, there is a grain of truth in both explanations but neither of them addresses the real problem, which is that our economy is suffering from of one of the worst economic disasters in the history of financial disasters. I have already addressed these issues on several posts (What Really Happened, Magic Beans, A Swing to the Right, Tax Philosophy ) so I won’t bother to go into them in a great deal of detail again but we have to understand the problem before we can come up with a solution and the soapbox prima donnas on both sides of the aisle are either incapable of understanding the issue or unwilling to deal with the reality that we are in serious trouble here and it is not going to be easy to put the pin back in the grenade.


Let’s take a look at where the deficit numbers come from, the discrepancy between what the CBO predicted and what we actually have taking place right now. The largest part of the difference came from two unexpected economic downturns. The first happened in 2001 and was a small recession compared to the second one but it was a downturn and it affected projections of both spending and revenue. When the economy goes down and unemployment goes up two things happen at the same time. The money the government takes in from tax revenues drops and the money it pays out in social programs goes up. Unemployment payments, welfare payments, Medicaid payments, and all forms of social services bear the brunt of the fact that people who aren’t working become dependent on social programs to survive. At the same time, tax revenue that isn’t being generated from these same people goes down. It is a double edged sword; one made worse by the fact that most Americans health insurance is through their employer so when they lose their job they lose their health insurance as well and the government then gets to foot the bill for their medical expenses. The second economic downturn which started in 2007 right before the election that put Obama in office was much more severe and much more damaging to both the US economy and the budget deficits because of both the longevity of the downturn and the universal severity of the problem.


Clearly, Obama can hardly be blamed for the economy he inherited no matter what the conservative right would have us to believe. It happened before he was elected and he is still trying to deal with the effects of this problem. We can argue whether he has dealt effectively with the problem but it is incontrovertible fact that the problem itself is one that he inherited from George W. Bush and the Congress in place while he was in office. How much of the current deficit problem is directly attributable to this economic downturn is a matter of some disagreement but most economists agree that it is by far the largest part of the current deficit issue; in the range of some 37% of the 2 trillion dollar deficit miscalculation of the CBO. This means that some 740 billion of the difference between the CBO’s estimates and reality is a direct result of the economic downturns that occurred before Obama’s election.


Another large chunk of the problem came from two programs that George W. Bush pushed through Congress. You remember him and his buddy Cheney who confidently boasted that Reagan had already proved that deficits don’t matter. While this is obviously a remark made in total ignorance of economic reality, it is part of the the same fable that Republicans have been telling since Reagan was in office. According to the Republican mantra that has been around since Reagan the answer is cutting taxes no matter what the question might be. Cutting taxes stimulates the economy which allows it to produce more revenue according to Reagan’s idea of economics which the first Bush president accurately described in a debate as “Voodoo Economics”. Unfortunately, he neglected to explain this fact to his son who believes to this day that what we need are more tax cuts for the wealthiest Americans. The truth is that the Reagan years doubled the deficit which is something that was deemed impossible previously without a major war like WWII. I have trouble understanding how even the most ardent Reagan worshipers gloss over the fact that he doubled the deficit in peacetime the first time we tried tax cuts for the wealthiest Americans. As a matter of fact, cutting taxes didn’t stimulate anything but the second phase of Reagan improvements which involved spending massive amounts of government money paying large corporations to develop military hardware did. This is exactly why the economy took off, it was the largest influx of government money into the economy we had seen and it worked like a charm as long as you ignore the fact that it doubled the deficit.


Getting back to the present situation, George W. Bush pushed through two major programs that had devastating effects on the deficit. The first was the Reagan mantra of cutting taxes on the wealthiest Americans. This of course had the same effect that it had in Reagan’s years; it caused a loss of tax revenue that led to significant deficit increases. Interestingly enough, Republican believers in the tax cut mantra still believe it is the answer today even though we have a lot of statistical data that proves it takes increases in revenue along with decreases in spending to lower deficits. All one has to do is compare the Clinton and Bush Sr. years to the Bush Jr. and Reagan years to see this in action but it really is as simple as addition and subtraction. Any child knows you don’t increase the amount of water in a bucket by punching a hole in the bottom of it. The second program that Bush pushed through was the Medicare Prescription Drug Act which basically increased the amount the government program would provide for paying for drugs for Medicare participants. While this is a much more noble cause than tax cuts for the wealthy it was implemented without a hint of how it was to be financed so naturally it just added to the deficit. The net effect of the Bush Tax cuts and the Prescription Drug Act changed the CBO’s predictions by some 33% (660 billion dollars of the 2 trillion) by the time the increases in interest payments on the debt it created are added.


If you add the 33% to the 37% you come up with some 1.43 trillion of the difference between the CBO’s prediction and what we are actually seeing. Try to keep in mind that this number is composed strictly of policy mistakes that were put in place before Obama’s election. It is interesting that the harshest critics of the deficit issue today are some of the same people who actually caused both of these problems to happen through de-regulation of the financial industry and tax cuts for the wealthiest Americans along with a Prescription Drug Act that was passed without any hint of how it would be financed.


Does this mean that Obama has no blame in the current fiasco? I would say that there is enough blame to go around for everyone but we will continue to look at actual numbers to see where the 2 trillion dollars difference between the CBO’s estimate and today’s reality was created. Another 20% of the difference can be found in Obama’s support for the continuation of the wars in Iraq and Afghanistan combined with the continuation of the Bush tax cuts along with the Wall Street Bailout that Bush signed and Obama supported. In other words another 400 billion of the 2 trillion dollar difference can be traced directly to these three policies that Bush put in place and Obama continued to support after his election. Many of Obama’s supporters were disappointed with his continuation of the wars in Afghanistan and Iraq. Without knowing the security information that Obama became privy to upon arriving in the White House it is hard to make judgments about his decisions along these lines. We can further question his support of the Wall Street bailout but most reputable economists believe that it was necessary to keep the international economy from a devastating collapse; one that we are still not completely sure won’t happen in the near future I might add. Extending the Bush tax cuts was unmistakably a bargaining tool that Obama used to get support for some of his other programs but I personally believe it was a bad deal and one that can be shown mathematically to have increased the deficit problem when we need to go the other direction. In any case, if you add the 400 billion to the 1.43 trillion above you come to a 1.83 trillion dollar figure or some 90% of the current deficit problem and we still have not gotten to any of the Obama programs that conservatives want to convince us are the root cause of the deficit.


Obama is not without blame in the current crisis. The stimulus bill that he helped push through Congress to get the economy going added another 7% to the difference between the original CBO estimate and the 2 trillion dollar deficit we have. Obama’s health care bill that he pushed through has also added to the problem, along with his initiatives on education, energy, and other social programs added another 3%. In other words, Obama’s programs which conservatives see as the socialist part of his agenda have added a total of 10% (200 billion) to the deficit problem.


To recap; policies and economic problems that occurred during the 8 year term of George Bush are the direct cause of 70% of the deficit problem we are faced with. Obama’s support for/ and extension of Bush policies added another 20%. Obama’s programs that he has personally pushed through add another 10%. The end result is that we have a 2 trillion dollar difference between what we should have in our deficit and what we are actually faced with and we are now faced with the reality that we have to deal with this issue before it gets any larger. There are only two ways to decrease the deficit, increase revenue and decrease spending. Unfortunately, we are now faced with such a severe problem that we will probably have to do both in large and painful increments to see our way clear of this issue. There is always the possibility that the economy will turn around and start to grow at a fast rate which will necessarily narrow the difference between what we take in and what we spend. Unfortunately, the deficit issue has grown to such proportions that growth is probably not possible without first cutting into the deficit. It still remains to be seen whether we can change our economic policies to actually deal with the issues that caused the economic collapse that triggered the biggest part of the deficit.