President Obama Doesn't Understand the Origins of the Deficit

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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

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July 28th, 2011 8:57 AM

President Obama Doesn't Understand the Origins of the Deficit

That is what he told the country in his address on Monday night. President Obama described a situation in which the government had been perpetually running large deficits since President Clinton left office. The deficit increased even more as a result of the recession.

For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation's credit card.

As a result, the deficit was on track to top $1 trillion the year I took office. To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more.

This is simply not true. In its budget projections from January 2008, the last set before the impact of the collapse of the housing bubble was clear, the Congressional Budget Office (CBO) projected a deficit of just $198 billion for 2009. This is less than one-fifth of the "on track to top $1 trillion" figure that President Obama gave in his speech. This is a serious error. One trillion is a much bigger number than $198 billion.

This difference is central to the budget debate. People can argue that the $198 billion deficit projected for 2008 was too large. But it would be absurd to claim it was out of control or represented any remotely serious threat to the nation's solvency. In fact, over the five years 2003-2007 the country's debt to GDP ratio was virtually unchanged, meaning that the country could run deficits of the same size (relative to the economy) literally forever.

This changed with the recession caused by the collapse of the housing bubble. It was the recession, and the response to it, that pushed the deficit in 2009 from the $198 billion projected by CBO to the over $1 trillion noted by President Obama in his speech.

No one can justify wasting money on wars that should not have been fought, giving away tax breaks to people who don't need them, or deliberately designing a prescription drug benefit so that it needlessly hands hundreds of billions of dollars to drug companies and insurers. But even with all of this waste, the deficit was still not out of control.

This is a central point that needs to be made 300,000 times in the current debate over the budget. The deficits were very much containable until the collapse of the housing bubble sank the economy. It was the economic collapse that gave us large deficits.

This should mean that our politicians focus on getting the economy back to normal levels of output. If the unemployment rate was back at the 4.7 percent rate of 2007 the bulk of the deficit would disappear.

This point may fall on deaf ears as Congress goes into its budget cutting frenzy, but the public should at least understand that these cuts are not an honest response to the budget situation. The Republicans have invented a phony past where President Obama is somehow spending money like crazy to have a good time. Unfortunately, President Obama has also invented a phony past of out of control spending, but made President Bush the villain.

The reality is that if we get big cuts to Social Security, Medicare, Medicaid and other essential programs it will be because the politicians who vote for these cuts want them. It is not because spending or the deficit were out of control and they had no choice.

One final point, when push comes to shove, the financial industry will make the Tea Party Republicans vote to keep them in business. Wall Street will suffer more than anyone from a default and it will not let it happen. The public should know this, certainly Wall Street does.