Wednesday, February 1, 2012

Obama Has Lowered the Deficit ...

... and that's not a good thing.

Obama has been hammered by the Republican presidential candidates over rising spending and expanding deficits. Mitt Romney, for example, runs the following on his web site:
During the Bush years, the nation’s deficit—the gap between what Washington collects and spends each year—hovered between 2 percent and 4 percent of GDP. These levels were already problematic and a cause for concern. During the Obama administration, however, the deficit exploded to 10 percent of GDP.
And, technically, Romney is right.

Created at
Romney fails to mention, however, three things. Firstly, after spiking to 10% for FY 2009, the deficit has been coming down -- though it's still higher than it used to be. (The red column is a projection based on this year's budget.) Secondly, presidents don't get to start their terms with a clean slate. Instead, they inherit the economic situation left behind by the former president. This is why the graph shows a surplus for Bush's first year -- FY 2001. Thirdly, the deficit is not simply a function of spending. It also involves revenues from taxes, and those plunged when we hit the recession, and they've get to recover to their pre-recession high.

From the Federal Reserve Bank of St. Louis

Spending has flattened, and revenues are beginning to pick up. But there's an argument -- okay, several arguments -- that this is a bad thing. To understand this, we need to remember that while the federal government can take counter-cyclical measures to combat a recession, states can't (and which is why our calls for a new stimulus package include compensatory aid to the states), as they are required to balance their budgets. So while the federal government has increased spending, no small part of that was negated by a decrease by spending by the states.

From Jared Bernstein (who takes his info from the BEA).

If state spending had no effect on GDP, we would have seen growth for the last quarter at 3.1% instead of the 2.8%. It's not a huge difference, but right now every tenth of a percent counts.

And, as Paul Krugman notes, many of those cuts have occurred in investments.

 Paul continues:
We’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.
It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.
What an utter disaster.
It is worth noting, though, that things would be much, much much worse if any of the Republican candidates were in actually in office right now.  All of Romney, Gingrich, Santorum and Paul support balanced budget legislation and, as we saw with state spending, balancing the budget during a recession is pro-cyclical -- it makes the recession worse.

Worser -- all of the Republican candidates are offering up tax plans with tax cuts that would make the deficit much worse. The Washington Post refers to Tax Policy Center calculations (but fails to provide a link) that Romney's plan would cost $180 billion, that Gingrich's plan would cost $850 billion, and that Santorum's plan would cost $900 billion — all for 2015 alone.

Ron Paul's plan was not scored by the Tax Policy Center, but according to his web site he would "[restrain] federal spending by enforcing the Constitution’s strict limits on the federal government’s power [to] help result in a 0% income tax rate for Americans." Presumably this would make the deficit worse, if the country were to survive.

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