Think George Bush Has Been A Fiscal Disaster? Think Again
One of the big raps on this President has been that he is out of control with deficit spending. Not true, particular when you consider he has faced 9/11, two wars, Katrina, and simultaneously pushed through major tax cuts. Although Katrina spending and the continuing War in Iraq may yet boost next year’s deficit, the current year’s red ink declined by about 20% from last year.
The first rule of economics, however, is that everything happens at the margin, and here the news is even better.
The White House and most economists say the truest measure of the deficit is relative to the size of the economy. In those terms, the deficit measured 2.6 percent of gross domestic product. The 2004 deficit, by contrast, equaled 3.6 percent of GDP. That is well below the post-World War II worst-ever record, a 6 percent figure set in 1983 under President Reagan.
Does that mean I like the fact the Bush has never met a spending bill he didn’t like? Not at all…but as with so many things, it helps to keep things in a little perspective. Yes, we need to control spending better…but things aren’t so dire as they may appear at first glance.
Spending for FY 2005 was up $178 billion over FY 2004 (20% of GDP — slightly higher than 2004). Katrina and Rita had virtually no effect on the FY 2005 budget because they came so late in the year (FY 2005 ended Sept. 30).
The improvement in the budget outlook came entirely on the revenue side. Revenues as a share of GDP rose from 16.3 percent in 2004 to 17.5 percent in 2005, the first such increase since Bush came into office.
Why the increase?
The CBO ascribes most of the increase to the expiration of tax provisions that depressed receipts in previous years. (One mentioned specifically was the expiration at the end of 2004 of provisions enacted in 2002 and 2003 that allowed additional first-year depreciation deductions for investments in equipment from corporate income taxes; corporate income tax receipts jumped 47.6% over 2004.)
(N.B., revenues are still below the postwar average of 18% of GDP, and far below the peak of 20.9% of GDP reached in FY 2000.)
I’m sceptical that this Administration and this Congress are going to let any tax cut provisions lapse permanently. So this jump in revenues is likely evanescent. I’m afraid it’s not time to pop the champagne corks yet.
The problem with this argument is that Bush started his Presidency with a budget surplus. The fact that the deficit wobbles on both sides of three percent of GDP is not the issue — rather, the more important fact is the trend from surplus to 3% deficit.
This is important for a few reasons. First, everything the Treasury borrows has to be paid back. So while the government may be running a 3% deficit on a current accounts basis, it is adding three or four hundred billion dollars to its liabilities. If you make $100K per year and at the end of the year your assets are down $3K, that’s not so bad. If in addition to being down $3000 you also took on $10K in debt, you didn’t have such a great year.
The secondary issue is that we have borrowed this money mostly from Asian central banks, who now have leverage over us. If they decide to stop buying treasury paper — becaue of a falling dollar, or if they run a deficit, or if they simply decide to buy other sovereign debt — then we are without a paddle. The government now has systemic deficits which have to be funded from somewhere, and the only way to attract investors to government paper is to raise interest rates to the level where they will sell. This causes all sorts of bad things, not least of which is recession.
The bigger sin is that we are borrowing all of this money at a time when the Fed has pushed interest rates to an historically low level, which has stimulated the economy (in addition to the stimulative effects of the tax cuts). Once the economy hits a rough spot, we’l; be paddle-less on Class Five rapids.
Financial markets are brutal and unstoppable. I’m old enough to remember gas lines, stagflation, Nixon’s wage and price controls, and Gerald Ford handing out Whip Inflation Now buttons. I have to believe anyone else who has lived through this –even the most diehard Bush loyalist — would have to think wistfully of when the economy had a wise steward like Robert Rubin at its helm.
Jacques and peter, you make good points…and as I stated in the post, I’m not happy with Bush’s spending record, I just think some people think the deficit is larger (in relative terms) than it really is. I do believe, however, like a good supply-sider Reaganite, that the best way to reduce deficits is to grow the economy, and that’s why I prefer spending cuts to tax cut recissions. Unfortunately, Bush doesn’t like cutting spending or raising taxes, and that’s where he takes some (legitimate) heat…
Peter-
That there was a budget surplus when Bush took office is a common misconception. In fact, during the Bush/Gore campaign of summer 2000 there was a projected budget surplus, but the result of the economic downturn in the fall was enough to erase this surplus.
I’m not entirely sure what you mean with your second paragraph. New debt is exactly the deficit plus the debt to the SSA. Since debt held by the SSA is in an important sense not real, effective new debt is exactly the deficit for that year – 2.6% of GDP.
I would not worry too greatly about Asian central banks. The economic cost to the U.S. of raising taxes or cutting spending would be significantly less than the cost to Asia of a U.S. recession. It is in their interest to prop up the dollar and keep money in the pockets of U.S. taxpayers. Even if they wanted to move away from U.S. debt, they would be forced to do so slowly – giving the U.S. plenty of time to respond.
I also don’t understand the complaint of your fourth paragraph. I mean, of course debt is being run up at the same time that the economy is being stimulated. That is the entire point of debt.
And, frankly, I don’t see a Republican administration instituting wage or price controls.
Did you just make that up?
In point of fact, the budget (the same number that Mark is crowing about for FY 2005) was in surplus in 1998 ($69.2 billion), 1999 ($125.5 billion), 2000 ($236.2 billion) and 2001 ($128.2).
Those are actual numbers, not “projections.” Before 1998, the last time the budget was in surplus was 1969 ($3.2 billion).
Now, the truly relevant number is the “on-budget” surplus (not counting Social Security). That was in surplus in 1999 ($1.9 billion) and 2000 ($86.3). Before that, I don’t know when it was ever in surplus; the CBO historical tables don’t go back that far. In 2004, that number was an astonishing $567.4 billion in the red. For 2005, that number is projected to be a still awe-inspiring $507 billion (4.15 of GDP). (Mark is free to crow if he wants.)
In what sense is it not real? Are we planning to default on SS payments to future retirees?
Now, Jacques, you surprise me! I wasn’t exactly crowing, I was just saying – well, maybe I didn’t make it clear what I was saying. Let me try again…even profligate spending can be less harmful than one might think as long as the economy is growing, and that’s why I’m still primarily a supply-sider. That was the point I hoped to make, in a roundabout way…
Mark, I think we can agree that, if you’re going to spend 20% of GDP, you can’t sustain that with a tax structure which (thanks to the Bush tax cuts) takes in only 17% of GDP. (The on-budget numbers are even worse.)
Where we, perhaps, disagree is whether you can find sufficient cuts in discretionary spending to make up the difference. (Or, given the choices involved, whether you really want to make those cuts.)
It’s certainly true that a growing economy presents you with the rosiest of budget scenarios (revenues are larger, entitlement outlays are smaller). If this team is running a deficit of 4.1% of GDP at the peak of the economic cycle, you can only imagine what the deficit will look like when the next recession hits.
Running this large a deficit (as a percentage of GDP) is not unusual, historically. What is unusual is to be running this large a deficit at the peak of the business cycle.
Sorry, I realize you weren’t exactly “crowing.” But TWL’s straight-faced denial of reality really set me off.
I’m less concerned with the US debt being held by the Japanese and the Koreans than the huge debt held by China. It is difficult to press our concerns about trade, copyright, and North Korea (among other things) when they are our largest purchaser of treasury paper. Imagine what would happen if there was a war over Taiwan.
Given the fact that the entire region had a financial crisis in the late 1990’s, I would be happier still if our debt were held by surer hands.
While we can assume their benign intentions because the current situation contributes to their growth, financial markets can move quickly and violently when everybody tries to get out the same door at once. I believe that the US trade deficit must lead to a weakening of the dollar at some point. When the dollar weakens, it might no longer be in the interest of Asian central banks to hold dollar-denominated debt, which can lead to a spiral of a plummetting dollar, recessionary economy, rising interest rates, and a distress market in US government debt. That’s what really worries me.
Jacques, I guess what troubles me the most is this – I could support this large spending (even with the tax cuts) on a temporary basis – I’ve got no problem with running a large deficit to fight a war (or two), or even to help Louisiana rebuild. Yet I see no indication that anyone is treating these deficits as temporary. And you’re right, long-term, it’s not sustainable. There are solutions, but nearly all are painful – and if it were proven that there was no possible way to dig out of the hole except to repeal all or part of the tax cuts, I could swallow it, reluctantly.
We’re not there yet…there are cuts that can be made (contra Tom Delay). My rap with Bush, then, is not that he is running large deficits again, as I indicated in my post – it’s that I don’t even see token moves made to control spending. And at this rate, it endangers many things near and dear to the conservative heart, such as Social Security and Tax Code reform…
Two other points for TWL:
1) I think it is reasonable for the government to take on debt in a recession. However, if it borrows greatly when the economy is doing reasonably well, then when the business cycle changes, you are left with a lot of debt and no longer have additional borrowing available as a lever to move the economy. There is plenty of stimulus from the Fed’s aggressive easing — the current Fed Funds rate is currently about equal to the inflation rate. Running deficits at this time is reckless.
2) The last administration to have wage and price controls was a Republican administration (Nixon).
Jacques-
Re: SSA debt, one of two things will happen. Either social security premiums will continue to exceed outlays, in which case the debt will never be repaid; or outlays will exceed premiums, in which case the shortfall will have to be made up out of the general fund regardless of debt held by the SSA. That is, whether or not payments will be made to the SSA out of the general fund is independent of the SSA holding debt. All SSA surpluses go into the general fund and all SSA deficits will be paid out of the general fund. Therefore SSA premiums and outlays are not meaningfully seperate from the general fund taxes and outlays. This is why SSA debt is, in an important sense, not real – there is no way of knowing what the future transfer of funds will be, either in amount or direction.
Re: surpluses, my only point was regarding the “on-budget” surplus that was projected for 2001 in the summer of 2000. I assumed that this was the surplus that Peter was discussing.
Peter-
I think that you may still be discounting the importance of the U.S. economy and the strength of the dollar to China. A fall in the dollar or a U.S. recession would destroy China’s economy, and do no small damage to the rest of Asia. I find it highly unlikely that they would bring an economic apocalypse down upon themselves – they are better off holding a bad investment, like U.S. debt, than starving.
Similarly, you can see that the U.S. has an easy out even if a run on the dollar were to occur: raise taxes. Because, again, higher taxes and slower growth beat lower taxes and a short-run economic collapse.
Also, umm, Carter had price controls, and my point about Republicans was that they learned their lesson from Nixon’s error. I mean, seriously, Nixon did a bunch of things that I would not expect Republicans to repeat.
There’s no way of knowing whether, or when, the accumulated IOUs in the SSA Trust Fund will be exhausted (since the reforms instigated by the Greenspan Commission in 1983, that date has been continually pushed back).
And, yes, it is technically possible that the US Treasury could simply default on the bonds held by the Trust Fund (when SSA outlays start to exceed revenues and the Trust fund begins calling in those IOUs).
All sorts of things could happen.
But, if you believe that the separate accounting (in which Social Security is currently in surplus, whereas the General Fund is horribly in the red) is a fiction, why did you focus your comment on the “on-budget surplus”?
The total budget (including SS) was still in surplus for FY 2001.
TWL:
1) Re your first point: well, we’ll see. I’m betting my own money that my forecast is correct by buying non-US sovereign debt. So maybe I’ll end up both wrong and insolvent.
2) Carter had price controls? I stand corrected, thanks –
Jacques-
I’m still not sure what your point is about SSA debt. I’m not talking about ludicrous hypotheticals – it is entirely within the realm of reasonableness that 1) SSA surpluses continue for some lengthy period of time relative to current projections or 2) SS premiums are raised or 3) benefits are cut. In fact I find it likely that that all three will happen – surpluses will continue longer than anticipated, as they always have, the ceiling on premiums will be raised or eliminated, and benefits will be subjected to means testing. If even one of these things happens it would push back any debt repayment, possibly indefinitely. This is assuming that SSA isn’t retired entirely and replaced with some variety of forced-savings regime, a possibility that is obviously less likely but that would make debt repayment a complete non-issue.
I just don’t see how we can view this as a real debt if we don’t know that it will have to be repaid. And, really, the SSA is loaning money to the general fund, but if the time comes that the SSA needs money the general fund would have to be drawn down to pay it even if those loans had never happened. You could try to account for future payments to the SSA as a liability, in other words, but it doesn’t really make sense to view it as debt.
And, again, I don’t view the SSA as being meaningfully seperate from the general fund, but as I recall (I could be mistaken) the discussion during the summer of 2000 – which is what I thought Peter was talking about – was about the “on-budget” deficit. This is why I brought that particular surplus up – apologies for the ridiculous lack of clarity.
Price controls on oil were instituted by Nixon in 1973, continued by the Ford and Carter Administrations, and were phased out by Carter in 1979.
So, yeah, I suppose that means, “Carter had price controls.”
Peter – I certainly think that buying up U.S. debt is a bad investment in itself – my only point is that China and other nations have no real choice in the matter, because the second order effects of their investments (a strong dollar/U.S. economy) are so positive for them.
I’m not saying that you’re wrong – the dollar is weak and is getting weaker. It just isn’t happening that quickly, and I expect that it won’t speed up in the future. I’m sure that you will make money investing in other debt – I just don’t know that you will make more than you would investing intelligently in U.S. stocks.
The U.S. economy is remarkably self-contained relative to the rest of the world, which is why I suspect that a relatively slow collapse of the dollar would be harmful, but not markedly so.
No, I’m pretty sure that any scenario to pay for the retirement of the baby boomers will requires running down the surplus in the trust fund (i.e., debt repayment). What’s fairly likely (if some combination of the three happens) is that SS remains “solvent,” i.e. that payments do not exceed current revenues + money taken from the trust fund.
If you prefer to call it a liability, that’s OK with me. The clear point, from either point of view, is that the crisis is not in the Social Security Fund, but in the General Fund (either because it won’t be able to make the expected payments on the Debt, or because it won’t be able to meet its expected future liabilities).
Fixing the hole in the General Fund is the problem and raiding Social Security (not that you are suggesting it, though others have) is not the solution.