Obama Halves the Deficit
By Nayyer Ali MD
America’s four-year long obsession with the nation’s deficit is finally going to come to an end. It has had a very perverse and negative effect on the recovery from this economic crisis, and the wrong lessons have been drawn with misplaced fears of America turning into Greece in the near future.
The reason for this imminent turn is that the massive deficits of the last few years are declining rapidly. In fact, in Obama’s first three years he cut the deficit by 30%, but few if any really noticed, and Mitt Romney made the budget deficit one of his core critiques of Obama. Obama was saddled with a mathematical problem. Most Americans view the deficit in terms of dollars, and blame the current President for the current deficit. This hurt Obama in two critical ways.
First, while Obama became President in January 2009, the government starts its budget from October 1 to September 30 of the next year. The 2009 budget was Bush’s last year not Obama’s first. Obama’s first budget started October 1, 2009. In Bush’s last budget the deficit exploded because of the financial crisis and Great Recession and went past a trillion dollars for the first time in US history. Over the next three years the budget deficit has stayed over a trillion dollars, so to superficial eyes, there has been no progress.
This leads to the second way Obama got little credit for the improvement we’ve had. The correct way to measure the size of a debt is in relation to income. The correct way to measure the size of the budget deficit is not in number of dollars but as percent of the total size of the economy. This number, the deficit as percent of GDP, is the correct lens in which to compare one year to the next, because the size of the economy is always growing due to both actual growth and inflation. Bush’s last deficit in 2009 was 10% of GDP, a massive amount. The last Obama deficit was still 1.09 trillion dollars, but was down to 7% of GDP, so it has been cut 30% from its peak.
The Congressional Budget Office, a non-partisan scorekeeper that issues budget analyses and reports, came out with their 10-year projection last week. They expect the current deficit to come in around 850 billion dollars in 2013, which will be about 5.2% of GDP. So Obama can claim that he has in fact cut the deficit in half in his first four years. But the news gets even better. By 2015 the CBO expects the deficit to be down to 2.5% of GDP, a very reasonable number and consistent with long term fiscal stability.
Why is the picture improving? Three reasons. First, the economic recovery has slowly gathered pace, resulting in more tax revenues and less government spending on unemployment insurance and other support programs. Second, Obama’s stimulus finished in 2011. Third, Obama raised taxes on the wealthy in the fiscal cliff negotiations at the end of the year, and the payroll tax cut was allowed to expire, raising taxes on all working people by 2% of income.
While this does bode well for America’s medium term finances, the shrinking of the deficit has been bad policy. One of the factors that has worsened this Great Recession is the one million public sector jobs, primarily schoolteachers and construction workers, who are missing because of austerity and government cutbacks at all levels. If we had borrowed more, run a slightly higher deficit, and kept those workers on the job, the economy would be recovering much faster and the unemployment rate would be down around 6.5%. The obsession with the deficit in the face of an ongoing severe recession with very low interest rates was wrong and hurtful to average Americans.
There is a long term reason to keep deficits down. The total debt of the nation can get too large and become a burden to keep paying the interest. But we are nowhere near that point, and the total debt as a percent of the economy, after rising sharply for the last 4 years, will now level off. The challenge for policy makers after 2016, and this will be after Obama leaves office, will be how to bring the deficit down even further, and begin reducing the debt burden back to lower levels. The primary driver of future deficits will be health care spending on the retired. That is a whole other issue, and best left to the future to decide.
For the next four years though, there will be nothing but good news on the deficit. It will steadily shrink, and Obama will leave office in a position to take credit for fixing the problem under his watch. In addition, the next four years will have very strong economic growth, although 2013 will be a bit slower due to tax increases and spending cuts agreed to in the fiscal cliff and sequestration deals. Obama will have plenty of economic wind at his back as he pursues his second term agenda. The economy will boom in 2014-2016, and this is going to set up the Democrats to hold the White House with ease in the 2016 election. The Republicans missed their chance to get Obama, and they may not get another shot at the White House till 2024.