Declining Deficit? DeanSpeaks, We Listen

Dean Baker criticizes two threads of how the press reports the deficit by taking a medium term perspective. The first is levied against those free lunch supply-side types:

If we go back to 2001, before the economy had the benefit of President Bush’s tax cuts, CBO projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. (CBO’s growth projections are constructed to average in the effect of recessions, so the 2001 recession should not affect this story. Furthermore, even the White House’s growth projections do not show the economy ever catching up to the path projected by CBO in 2001. In other words, the White House’s economists don’t believe that the tax cuts have had any substantial impact on growth.) Getting to tax revenue, CBO’s projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation) than the White House’s latest figure. In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path. Users of arithmetic know that the tax cuts did not come anywhere close to paying for themselves. The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. There is always a large random component to tax collections. Arguing about the budget situation based on these random fluctuations is like drawing conclusions on global warming based on yesterday’s weather.

Dean also notes that the rise in debt relative to GDP over the past five years has not yet bankrupted the Federal government. If critics of Bush’s fiscal fiasco (which includes yours truly) are writing such statements, we need to be more clear. The point is that we cannot sustain the current course of fiscal policy just as we could not sustain the Reagan fiscal fiasco forever. We did see a reversal of the upward path of the debt to GDP ratio once we decided to reverse those tax cuts and had the luxury of the peace dividend. So are we on a bankruptcy path? No – unless President Bush gets his way and makes these tax cuts sine spending cuts a permanent policy. But our point has been – or should be – we never had a tax cut but rather a tax shift. In other words, President Bush has passed some rather massive increases in deferred taxes. Who will pay those deferred taxes? Don’t look to the leadership in the Republican Party to tell us the truth to this question.

Update: Phil Kerpen takes the long-term view:

The deficit is actually quite modest in historical terms … Since current budget deficits are affordable, any fiscal focus on them is misdirected. That said, the country’s true fiscal outlook is not so good. A pair of reports released in May by the Medicare and Social Security Trustees and the Government Accountability Office, respectively, should serve as a wake-up call for the public and our elected representatives … The off-the-books, unfunded obligations of the federal government are an order of magnitude greater. The GAO found that the government’s true debt – on-the-books and off – more than doubled between 2000 and 2005, and now stands at a staggering $46.4 trillion. GAO, it seems, actually low-balled the true debt by using the entitlement obligations for only the next 75 years. To permanently fix these programs we’d have to put up enough money to cover all of their obligations forever. That’s where the Trustees Report comes in. Using the estimates from that report, the federal government’s true debt is shown to be a stunning $94.7 trillion … The Social Security program alone has a $13.4 trillion liability, more than all of the government’s on-the-books debt combined.

Now I understand why both Bruce Bartlett and Max Sawicky hate these long-run present value calculations. Kerpen is spinning that it’s those Social Security benefits that are the real problem even that 13.4 divided by 94.7 is less than 15% of the very long-term issue. What constitutes the other 85%? Maybe it’s those tax cuts financed by increases in defense spending? Or maybe it’s that expensive prescription drug benefit financed by more tax cuts.

It would have been nice had Kerpen told us the present value of expected future GDP so we could take this $13.4 trillion relative to the present value of expected future GDP. Then we would realize that the reduction in Social Security benefits and/or the increase in the payroll tax is actually quite modest. But had Kerpen written something a little more honest – I doubt Rich Lowry would have allowed him to publish it.