Why we have a deficit

Deficit spending is the official excuse for the Tea Party revolution and the force that threatens to drive our economic policy for the next few years, just as it is already driving the British government. Our gigantic deficit for fiscal 2010 is now projected at $1.294 trillion dollars, about 10% of our GDP. Just ten years ago, in fiscal 2000--the last year fully within the Clinton Administration--we had a surplus of 2.4% of GDP. This ranks as a financial revolution comparable to what happened from 1933 to 1950, or from 1979 to 1991 or so, and given how heated issues of government finance have become, it behooves us to ask how all this happened. Thanks to the magic of the web, figures are near at hand.

Budgets, of course, are composed of revenues (mostly taxes) and expenditures. Let us begin with taxes. In fiscal 2000, federal taxes brought in 20.6 % of GDP, including 10.2% of GDP from federal personal income taxes, 2.1% from corporate income taxes, and 6.6% from Social Security taxes. This year they are estimated to bring in 14.8% of our GDP, that is, almost 6% less. Judging from figures from the last pre-recession year of fiscal 2007, about half of that 6% is due to the Bush tax cuts and the other half is a result of our economic collapse. The composition of that 14.8% has also changed dramatically: only 6.4% of it comes from personal income taxes, 1.1% from corporate, and 6.0% from Social Security taxes. In 2000 the progressive income tax brought in about 66% more than the regressive social security tax. Now they bring in nearly the same amount of money. In short, restoring the Clinton-era level of taxation would significantly reduce the deficit, in and of itself. Yet I do not know of anyone besides myself who is openly advocating that that be done.

While taxes have gone down, outlays have gone up--way up. Federal spending was 18.2% of GDP in 2000; it is 25.4% of GDP now. We can disaggregate this 33% increase in the budget as a share of GDP. The defense budget took up 2% of GDP in 2000; it now takes up 4%, or twice as much. The entire increase can be chalked up to the war on terror, an undertaking of most dubious utility. Spending on humman resources has gone up more, from 11.4% of GDP to 17.1%, a 6.7% increase. Within that 6.7%, medicare, other health spending and social security have each added about 1% of GDP to the total, and another category, "income security" payments, has added 2% more. I need to research that category, which I suspect is composed mainly of federal pensions. The remaining 1% or so of the increase is divided among veterans' benefits and education.

One astonishing item caught my eye--one that certainly needs more explanation. Thanks to George W. Bush's impact on the budget, the national debt is more than twice what is was in 2000--yet interest payments are actually down as a share of GDP, down an entire point from 2.3% to 1.3%. Thanks to the growth of our economy and above all, I would guess, to the lowest interest rates in history over the last decade, we hardly pay more to service our debt now than we did ten years ago. Meanwhile, stimulus money is already a relatively small entry, presumably under the employment and training category.

The source of our deficit, then, is pretty clear. About 1/4 of it is the responsibility of the Bush tax cuts, and another 1/6 is the fault of the Iran and Iraq War. Yet another 1/6 comes from rising health care costs, and another 1/4 from increased social security payments (which are wisely being capped at the moment) and other government income maintenance. The Obama Administration recognized the need to do something about health costs, but probably failed to do so. It has shown no sign of giving up our adventures in Central Asia, and it only wants a relatively modest increase in taxes, confined to truly wealthy Americans. That, however, is almost certainly going to be impossible after the election, and it will have to choose between a tax hike for everyone--my preferred course--or no tax hike at all.

In Republicanland, however, orthodoxy holds that any tax hike is out of the question, as are, apparently, any cuts in Medicare or Social Security. (The elderly are for the moment a huge part of the Republican base.) The Republicans are saying nothing about the defense budget, or, indeed, about much of anything. In short, if in fact the Tea Party really is serious about anything except expressing their hatred of Barack Obama--which I doubt--they are probably in for a major disappointment. The Presidential commission on the deficit will report after the election and, I suspect, will make some of the same points that I just did. I very much doubt, however, that the new Congress will take appropriate action.