Cutting through the media spin on "our increasing debt problems"

[ProSense]

Blaming It on Obama

<...>

In the 2008 report, discretionary outlays for 2009-18 are $12.4 trillion. In the 2009 report, that figure is now $13.7 trillion, for a difference of $1.3 trillion; that’s the most you can credibly blame on “the Obama administration’s planned budgets” — and even that includes the stimulus package from earlier this year, which was a response to a severe recession.

So where do the other $7.0 trillion come from? Increases in mandatory spending are $0.8 trillion. Increases in net interest payments are $1.5 trillion. But the big whopper is on the revenue side, where revenues are projected to be $4.6 trillion lower.** That is, you get a picture like this:

<...>

So far, of the $8.3 trillion change in our projected fiscal situation, 16.1% is due to discretionary spending. 56.0% is due to lower revenues caused by … the recession and the financial crisis.

But wait, that’s not all. The increase in the national debt would only be from 40.8% to 60.9% (not 67.0%) of GDP if 2018 GDP remained where it was projected in 2008. However, between the 2008 and 2009 CBO reports, projected 2018 GDP has fallen from $22.4 trillion to $20.3 trillion. That’s also due to the recession and the financial crisis. A smaller denominator means the same debt becomes a larger proportion of GDP.

In short, the problem is that the economy collapsed. Blaming our increasing debt problems on “the Obama administration’s planned budgets,” when they are responsible for one-sixth (or one-fifth, if you read footnotes) of part of the problem (the part not due to a shrinking denominator), is deeply misleading. It also leads to the wrong conclusion: cut spending.

What’s the right conclusion? Simon, my co-author, has been going around saying that the real cost of the financial crisis would be an increase in government debt of 40 percentage points of GDP. I’ve been telling him that I’m nervous about that number, because the long-term debt problem has always been with us, and it’s called Medicare. Well, it turns out Simon was right. The 2008 CBO report projected that by 2018, debt held by the public would be only 22.6% of GDP. The 2009 report projects 67.0%, for an increase of 44.4 percentage points. (I guess I should have trusted Simon; he is on the CBO’s advisory panel, after all.) What happened between those reports? The financial crisis and a severe recession. And if we want to prevent that from happening again, we need to reform our financial system.

* Baseline Scenario readers are likely to have noticed that $8.3 trillion is a lot more than 26% of GDP (even in 2018), yet the debt figure only goes up by 26 percentage points. The reason is that the CBO’s debt figure only counts debt held in public hands; the rest of the increase in the debt is absorbed by Social Security and other government accounts. My point here is only to show the proportional contributions to the increase in the debt.

** You could argue that the Obama budgets should be charged a portion of the change in net interest expense. Since discretionary spending is responsible for about 20% of the change other than net interest, it should be charged 3.6 percentage points of the change in net interest, bringing discretionary spending’s total contribution to 19.7% of the $8.3 trillion.

[Jim Sagle]

1. Debt is a BIG problem when a Democrat is President; otherwise "deficits don't matter."

[Skink]

2. What?

[Democrats_win]

3. Democrats should spend now or the Republicans will spend later.

Just like Carter didn't spend and Reagan did or the way Clinton didn't spend and W.orthless Bush did.

And you know where the Republicans will spend it--the Pentagon. That's why they put a hole in the middle of the Pentagon so everyone will recognize it as a toilet for taxpayer money.