The Deficit

US Debt [wikipedia.org]

David Leonhardt of The New York Times

America's Sea of Red Ink Was Years in the Making
by David Leonhardt
[The New York Times - Jne.09]

There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.

The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.

Mr. Obama — responding to recent signs of skittishness among those lenders — met with 40 members of Congress at the White House on Tuesday and called for the re-enactment of pay-as-you-go rules, requiring Congress to pay for any new programs it passes.

The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.

The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It’s a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists’ assumptions about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.

If the analysis is extended further into the future, well beyond 2012, the Obama agenda accounts for only a slightly higher share of the projected deficits.

How can that be? Some of his proposals, like a plan to put a price on carbon emissions, don’t cost the government any money. Others would be partly offset by proposed tax increases on the affluent and spending cuts. Congressional and White House aides agree that no large new programs, like an expansion of health insurance, are likely to pass unless they are paid for.

Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study on the dangers of the current deficits, describes the situation like so: “Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.”

“And,” he added, “not fixing it is, in a sense, making it worse.”

When challenged about the deficit, Mr. Obama and his advisers generally start talking about health care. “There is no way you can put the nation on a sound fiscal course without wringing inefficiencies out of health care,” Peter Orszag, the White House budget director, told me.

Outside economists agree. The Medicare budget really is the linchpin of deficit reduction. But there are two problems with leaving the discussion there.

First, even if a health overhaul does pass, it may not include the tough measures needed to bring down spending. Ultimately, the only way to do so is to take money from doctors, drug makers and insurers, and it isn’t clear whether Mr. Obama and Congress have the stomach for that fight. So far, they have focused on ideas like preventive care that would do little to cut costs.

Second, even serious health care reform won’t be enough. Obama advisers acknowledge as much. They say that changes to the system would probably have a big effect on health spending starting in five or 10 years. The national debt, however, will grow dangerously large much sooner.

Mr. Orszag says the president is committed to a deficit equal to no more than 3 percent of gross domestic product within five to 10 years. The Congressional Budget Office projects a deficit of at least 4 percent for most of the next decade. Even that may turn out to be optimistic, since the government usually ends up spending more than it says it will. So Mr. Obama isn’t on course to meet his target.

But Congressional Republicans aren’t, either. Judd Gregg recently held up a chart on the Senate floor showing that Mr. Obama would increase the deficit — but failed to mention that much of the increase stemmed from extending Bush policies. In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts, which will send the deficit higher.

Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. “The G.O.P. is not serious about cutting down spending,” the conservative Cato Institute concluded.

What, then, will happen?

“Things will get worse gradually,” Mr. Auerbach predicts, “unless they get worse quickly.” Either a solution will be put off, or foreign lenders, spooked by the rising debt, will send interest rates higher and create a crisis.

The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.

E-mail: Leonhardt@nytimes.com

COMMENTS
Allocating blame is interesting media churning, but we need a credible game plan...and that is the essence of the President's responsibility. I know you love the guy, but when is the heat going to be applied?

No mention of the defense budget. Don't we all wonder why European countries can afford such generous social benefits? Because we're paying for their defense.
There's a huge chunk of savings to be had if we could just stop playing World Policeman. Of course defense company lobbyists will never let that happen.

I'm pretty certain that any type of 'meaningful' healthcare reform is going to take a lot more than a quick technical fix.
How about starting things off by deprogramming all the physicians out there who have built up some ridiculous sense of entitlement?

Republicans do not want to acknowledge their role over the last decade in creating this fiscal mess. If you look at states with Republican governors and legislatures you would see that they are performing worse than their democratic counterparts as well. Florida, Nevada, California and Georgia lead the nation in bankruptcies, foreclosures and unemployment. And they have one thing in common: Republican governors.

Maybe it's time to start questioning why the US spends more on "defense" than all the other countries of the world COMBINED. Are we really so threatened everywhere, by everyone, that we need over 700 military bases around the world? Are billion dollar bombers really needed to defeat a bunch of guys living in caves (al Qaeda)? Or has "defense" become the biggest welfare program of all, always looking for new enemies to justify its existence?
Maybe if we only had maybe 400 military bases around the world and a few less high tech systems we could afford to provide basic healthcare for all our citizens for free. Just a thought.

Its frequently asked, " When will the foreigners decide to stop funding our debt?". At which point we will be on our own and forced to live with the decisions we have made.
But here's another one: At what point will the next generation say ' I am not funding the baby boomers retirement'? Or 'I am not having my kids pay for someone else's retirement'?

The reason we are fighting wars in three different countries and bailing out billionaires all the while being broke is not because of the right or left; it is because of the right AND left! As long America continues to mindlessly categorize itself politically as either a Republican or Democrat nothing of true substance will change. Bankers will continue getting bailouts, the poor will be the sacrificial lambs of our military while Lockheed and the like rake in record profits, and the rest of us will watch as our government robs us blind by funding the aforementioned.

It was Herbert Hoover who said: "You know, the only trouble with capitalism is capitalists. They're too damn greedy."

I guess Republicans are not the fiscal conservatives they claim to be considering they controlled both houses of Congress most of the Bush years.
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A Conversation About the Growing Fiscal Deficit
QUOTES
NOT to put too nice a word on it, the long-term prospects just look horrendous, just terrible. And we’re going to have to make some major fiscal adjustments so that those projections never come true.

THE very large deficits we’re running in the short run are going to bring the long
run closer to us a lot faster than we had thought.

IF we don’t act very soon, the capital markets are going to make us act.

IT turns out those Clinton era forecasts were just too optimistic.

THERE isn’t much stomach among either members of Congress or, quite frankly, the
American public, I don’t think, for this kind of serious deficit reduction.

BOTH Democrats and Republicans in Congress have rejected relatively small
attempts to raise revenue coming from the White House. And so, Congress seems even less serious about this than the administration does.

THEY were taking little baby steps, and Congress was saying, no, no, no, we like this program too much.

THE real way to reform health care is to put stuff in place that says, you know what, these services you’re providing aren’t actually making people healthier. We’re going to stop paying for them.

WHEN you see Republicans in Congress holding up charts saying that Obama would increase the deficit by this huge amount, what they’re often not saying is that most of the increase in that deficit is in policies that Republicans themselves support.

THE kind of deficit that you see year to year doesn’t fully capture the extent of this problem.

HE (Obama) sort of backed himself into a corner with this whole notion that he will not raise taxes for people making less than $250,000 a year, which is a huge portion of the population, and that’s going to make it very hard to raise taxes in a way that will help pay for these Medicare and Social Security promises.

THE real conundrum we face is, by the time they finally realize that we need to do something about the problem, the time to do something about the problem will have passed. We’ll then be in a crisis, and our options will be limited and the changes we make will be very painful.

I THINK it’s the politics more than the economics that is keeping them from acting on it (the deficit).

WE don’t want to actually have tax increases or large spending cuts now. But start laying the ground work for these things to occur, starting in a few years. There is certainly nothing wrong with that. I think that would actually have a positive effect on the state of the economy right now.