So what caused the string of federal deficits? It’s not what you think.

The greatest obstacle to a Republican recovery is the domestic performance of the Bush II Administration – particularly regarding government spending.  That said, there is a myth that has grown regarding Bush’s policies and how each one affected the federal government’s fiscal standing – a myth Brian Riedl partially debunks in the Wall Street Journal.

The myth is that Bush sank the budget surpluses through tax cuts and wars:

Sen. John Kerry (D., Mass.), for example, has long blamed the tax cuts for having “taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see.” That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade.

. . .

The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing?

That’s the important question.  Riedl goes through the numbers and breaks it down thusly:

  • “economic and technical revisions”: 33% ($3.9T)
  • “other new spending”: 32% ($3.7T)
  • Bush tax cuts of 2001 and 2003: 14% ($1.7T)
  • “net interest on the debt”: 12% ($1.4T)
  • Obama stimulus: 6% ($702B)
  • “other tax cuts”: 3% ($351B)

Reidl, just looking at the tax cut effect, declares Bush acquitted:

If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.

There’s a little more to it, though.  Added net interest on the debt, for example, is really caused by everything else. After all, new spending requires new borrowing, and new interest payments.  This is especially true given that interest rates were relatively stable for much of this decade before falling during the Great Recession.  So, one should really increase each remaining category by 14% (12/88), which bring us to . . .

  • “economic and technical revisions”: 38% ($4.4T)
  • “other new spending”: 36% ($4.3T)
  • Bush tax cuts of 2001 and 2003: 16% ($1.9T)
  • Obama stimulus: 7% ($798B)
  • “other tax cuts”: 3% ($399B)

I would also add “other tax cuts,” given that most were probably under Bush’s watch.  Thus, the tax cuts turned $5.6T in accumulated surpluses into . . . $3.3T in accumulated surpluses (keep in mind, this is with “static scoring,” i.e., we assume no benefits to the economy – and federal revenues - due to the tax reductions).  So, in the worst case scenario, cutting taxes this decade didn’t even reduce surpluses in half – let alone knock the federal government into deficit territory.

Ah, say Bush critics, but what about Afghanistan and Iraq?  A fair question, which Riedl doesn’t address.  As it turns out, the Congressional Research Service has compiled numbers for the cost of the war through FY10 (save the $37B in supplemental funds soon to be approved) – $1.08T.  Assuming the $37B goes through, and the spending in FY11 stays on the same course (FY10 war spending, supplemental included, was $25B higher than FY09), the total comes to $1.32T – $1.5T if interest is added (using the aforementioned 14% factor).

So . . . the tax cut and two wars, which the Democrats insist set us careening into red-ink land, turned $5.6T of accumulated surpluses into $1.8T in accumulated surpluses.  On average, this would have $180B a year – higher than any budget surplus but one: FY2000.

So what happened?

For starters, spending happened.  For a defense of Bush’s domestic spending spree, go somewhere else.  In total (including the Obama stimulus), spending hikes took a $3.3T bite out of the fiscal picture – larger than the wars or the tax cut, and just $500B lss than both combined.

However, even that comes in second to “economic and technical adjustments” – a fancy way of the CBO saying: ya know about those numbers we gave you earlier?  Never mind.

To wit (Reidl again):

It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.

To recap, since the CBO’s $5.6T surpluses-over-the-decade projection, we’ve seen two recessions, 9/11/01, the denoument of the tech bubble bursting, and the housing bubble building and bursting.

In other words, while the left accuses the former President of ruining the fiscal health of the nation with tax cuts and wars, and the right accuses him of ruining the fiscal health of the nation with runaway spending, the reality is that our federal government was far “sicker” from a fiscal perspective than we let ourselves believe.

The left will still slam the tax cuts and wars, and the right (including yours truly) will still slam the domestic spending, but let’s all acknowledge that when it comes to the effects of all of the above on the budget, we’re building our arguments on foundations of sand.

Cross-posted to BD

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6 Responses to So what caused the string of federal deficits? It’s not what you think.

  1. [...] Cross-posted to RWL reddit_url = http://bearingdrift.com/2010/07/14/so-what-caused-the-string-of-federal-deficits-its-not-what-you-think/;reddit_title = So+what+caused+the+string+of+federal+deficits%3F+It%27s+not+what+you+think.;reddit_newwindow='1';yahooBuzzArticleHeadline=So+what+caused+the+string+of+federal+deficits%3F+It%27s+not+what+you+think.;yahooBuzzArticleId=http://bearingdrift.com/2010/07/14/so-what-caused-the-string-of-federal-deficits-its-not-what-you-think/;Share [...]

  2. LarryG says:

    I never blamed Bush for it all and for the most part simply responded to those who say Obama caused it while ignoring what happened the prior 8 years.

    And the cost of wars would not have mattered if we had simply paid for them instead of cutting taxes.

    But the most important thing to recognize is how much of this is entitlements and how much is “other govt spending” and how to fix it.

    A big, big component of this is entitlements, not govt or even military spending and without reforms in entitlements – it tends to put the focus (wrongly) on “other” and military because not even horrendous cuts in both of them will fix the deficit in the absence of entitlement reforms – and the PRez and his advisors have made this same point.

    My basic complaint is that most of us know what the tax&spenders are going to propose but where is the proposal from the fiscal conservatives to truly address the entitlement issue?

    I don’t the Republicans can be expecting to get voted into office without an articulated vision of what they would do … instead of opposing what the Dems would do.

    ya’ll have to address the entitlements and so far. I’ve not see a cogent offering.

  3. D.J. McGuire says:

    Larry, it was a more general comment on Bush critics, not specifically aimed at anyone.

    It’s not all about you. :)

    I agree entitlements need a long, hard look, and Paul Ryan and John Boehner are starting to do that (emphasis on starting), although Boehner’s attempt to discuss moving the SS retirement to 70 earned him the wrath of the left.

  4. LarryG says:

    I was not taking it personally.. just explaining that some of the “look what Bush did” has been in response to “Obama did it” rhetoric.

    I’m convinced that we’re not going to address any of these issues until enough folks on the left and right find agreement … on enough things to go forward on – as opposed to every issue becoming an unresolvable wedge issue predicated on one side or the other assuming full control of the political apparatus and then implementing what their base wants.

    the current narrative of big, bad, incompetent, wasteful.. govt ..needs to be “reined in and cut” …. as a solution to the deficit is not real.

    The deficit in large part is the entitlement issue and the solution is going to be to cut social security and Medicare… both of which will cause howls of protest from the left – AND the right …

    we are fooling ourselves if we thinking “cutting government” is going to fix the entitlement problem.

    The deficit problem is US… and our incorrect beliefs that wasteful govt spending is the problem.

  5. [...] disaster that was Bush the Younger’s domestic spending record a couple years ago. I noted it here. The trouble actually began long before 9/11, Afghanistan, or Iraq. In President Bush’s first [...]

  6. [...] disaster that was Bush the Younger’s domestic spending record a couple years ago. I noted it here. The trouble actually began long before 9/11, Afghanistan, or Iraq. In President Bush’s first [...]

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