Myths and falsehoods about the deficit

››› ››› JEREMY HOLDEN

In recent months, media figures have advanced a litany of false and dubious claims regarding deficits and public debt. In addition to promoting the false narrative that portrays Republicans as responsible budget stewards and Democrats as fiscally reckless, these claims advance the argument that the administration should cut spending and focus on balancing the budget in the short term, a position rejected by numerous economists who advocate for continued stimulus spending.

Myth: Obama is to blame for the 2009 deficit

Myth: Health care reform is too expensive, given the deficit

Myth: Wars, tax cuts don't count toward current deficit and debt projections

Myth: Deficit reduction would help to create jobs

Myth: Obama is to blame for the 2009 deficit

In criticizing the deficit, media figures including Dick Morris, Eric Bolling, Karl Rove, and Glenn Beck have attributed the entire deficit for fiscal year 2009 to President Obama. In fact, only a small portion of the fiscal year 2009 deficit is due to Obama's policies; in January, before he took office or signed any legislation, the Congressional Budget Office projected that based on policies set under Bush and economic conditions at the time, the deficit for fiscal year 2009 would reach $1.2 trillion.

FACT: Majority of FY 2009 deficit attributed to Bush policies

$1.2 trillion of $1.4 trillion deficit was already projected before Bush left office. The CBO projected on January 7, 2009, that, including spending authorized under the Bush administration for the Troubled Asset Relief Program (TARP) and government takeovers of Fannie Mae and Freddie Mac, the deficit would total $1.2 trillion. According to the CBO, the actual FY 2009 deficit was $1.4 trillion.

NY Times: Obama policies are "responsible for only a sliver of the deficits." According to a budget analysis done by The New York Times, "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 increase between the FY2008 and FY2009 budget deficit estimates. The New York Times analysis also stated that 70 percent of the increase is due to a combination of economic hardships, including "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" and "new legislation signed by Mr. Bush ... like his tax cuts and the Medicare prescription drug benefit."

Myth: Health care reform is too expensive, given the deficit

Media figures including Fox News' Stuart Varney, Bill Hemmer, and Charles Krauthammer and CBS News' Nancy Cordes have advanced the false claim that health care reform proposals that were passed by the House and Senate would exacerbate the deficit and debt. However, the most recent CBO analyses of the health care reform bills estimate that the legislation would actually reduce deficits by more than $100 billion through 2019 and would continue to reduce deficits in the subsequent decade.

FACT: CBO projected Senate, House health bills would reduce deficit

CBO: Senate health care reform bill yields "a net reduction in federal deficits of $132 billion" over 10 years. From the CBO's December 19, 2009, cost estimate of the Senate bill incorporating the manager's amendment:

CBO and JCT estimate that, on balance, the direct spending and revenue effects of enacting the Patient Protection and Affordable Care Act incorporating the manager's amendment would yield a net reduction in federal deficits of $132 billion over the 2010-2019 period.

CBO expects bill to continue reducing deficit during decade after 2019. CBO also estimated on December 20, 2009, that the Senate bill will continue to reduce the deficit beyond the 10-year budget window that ends in 2019 "with a total effect during that decade that is in a broad range between one-quarter percent and one-half percent of GDP."

CBO also estimated the House health care reform bill will result in deficit reductions through 2019 and in the subsequent decade. From a November 6, 2009, CBO estimate:

According to CBO and JCT's assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $109 billion over the 2010-2019 period (see Table 1) [this estimate was later updated to $138 billion over the same period]. In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

Myth: Wars, tax cuts don't count toward current deficit and debt projections

In reporting on deficit concerns, media figures and outlets, including The Washington Times, have attacked Obama's fiscal record while ignoring the effect that the wars in Iraq and Afghanistan and the Bush tax cuts have had on the current fiscal environment.

FACT: Wars in Iraq and Afghanistan, Bush tax cuts contributed significantly to debt

CRS: "Congress has approved a total of about $944 billion" for operations "initiated since the 9/11 attacks" through the end the 2009 fiscal year. In a September 2009 report titled "The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11," the Congressional Research Service (CRS) stated, "Congress has approved a total of about $944 billion for military operations, base security, reconstruction, foreign aid, embassy costs, and veterans' health care for the three operations initiated since the 9/11 attacks." CRS added, "This $944 billion total covers all appropriations approved by Congress for FY2001 to meet war needs through FY2009," which ended September 30, 2009.

Krugman: tax cuts cost added "more than $2 trillion in debt"; Iraq war "has cost at least $700 billion." In an August 27, 2009, blog post, Nobel Prize-winning economist Paul Krugman stated, "There were two big-ticket Bush policies. One was the tax cuts, which cost around $1.8 trillion in revenue; add in interest costs, and we're presumably talking about more than $2 trillion in debt. The other was the Iraq War, which has cost at least $700 billion, and will cost more before we finally extract ourselves." Krugman continued:

Without these gratuitous drains on the budget, it seems fair to assert that we'd be coming into this economic crisis with a federal debt around 20 percent of GDP ($2.8 trillion) smaller than we are. And that, in turn, means that we'd be looking at projected net debt in 2019 of around 50 percent of GDP, not 70.

And that would definitely not be a scary number. Net federal debt was 49 percent of GDP in 1993, at the end of the Reagan-Bush years; Bill Clinton did move to reduce that number, and succeeded, but the nation wasn't facing imminent crisis.

Baker: Stock market, housing crashes, and wars "explain the vast majority of the deterioration in the budget situation in the last decade." Criticizing an NPR interview with David Walker, president of the Peter G. Peterson Institute, economist Dean Baker stated in a January 11 American Prospect blog post, "Walker explained the shift from the large surpluses at the end of the Clinton era to the deficits the country is now seeing without reference to the wars in Iraq and Afghanistan and Iraq that have already added more than $1 trillion to the debt, the housing crash which has increased the debt by more than $1 trillion in 2009 alone, and the stock market crash which through [sic] the country into recession in 2001 and cost the country more than $500 billion in capital gains tax revenue." Baker added:

While these developments explain the vast majority of the deterioration in the budget situation in the last decade, they were not mentioned once by either Walker or the reporter conducting the interview. Instead, Walker blamed an irresponsible Congress that allowed the money to burn a hole in its pocket. Even if it does not fit reality, this story fits with Mr. Walker's political agenda of creating a special commission that will issue a proposal to cut the deficit that is fast-tracked so that it does not follow normal congressional procedures.

NY Times: 33 percent of "$2 trillion swing" from surplus to deficits attributed to Bush policies "like his tax cuts and the Medicare prescription drug benefit. A June 9, 2009, New York Times article reported that 33 percent of the "$2 trillion swing" from surpluses projected by the CBO in 2001 to deficits "stems from" legislation signed by Bush. The Times added: "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."

CBPP: "the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years." In a December 16, 2009, analysis of federal deficits, the Center on Budget and Policy Priorities stated, "Some critics charge that the new policies pursued by President Obama and the 111th Congress generated the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years." CBPP included the following chart illustrating various factors' relative effects on current and projected deficits:

deficits

Myth: Deficit reduction would help to create jobs

In attacking Obama over deficits and the unemployment rate, media conservative have argued -- in the words of Fox News contributor Stephen Moore -- that "getting people back to work should be priority number one," but "we've got to start worrying about the debt, about these huge deficits," adding that the current deficit and projected debt are "having a very negative effect on people's psychology about where this economy is headed" [Fox News' On the Record with Greta Van Susteren, 12/17/09] (from the Nexis database). Likewise, Rove stated that Obama "could have a real option to create jobs, and that would be to take tough actions that would actually stimulate small businesses and bigger enterprises to actually go out and create jobs," while citing deficits as a factor that signals bad news for "companies and their businesses and their chances to make a profit" [On the Record, 12/4/09] (from Nexis). Historical evidence undermines the suggestion that the administration should focus on deficit reduction in order to create jobs, and economists have said current deficits are helping the economy.

FACT: Past efforts to address deficits before full recovery cited for further economic decline; economists say deficits are helping

Prominent economists: Unemployment rate rose after FDR attempted to balance the budget during Great Depression. Responding to numerous conservative media figures, who criticized Obama's earlier proposals for large-scale stimulus spending by denouncing Franklin Roosevelt's New Deal policies as ineffective or damaging, several prominent economists argued that the unemployment rate rose in 1938 because Roosevelt did not go far enough in pursuing New Deal stimulus policies and because his attempts to balance the budget hindered recovery.

Krugman: "deficits are actually helping the economy." In an August 27, 2009, New York Times column, Krugman stated, "Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it's not catastrophic." He further stated:

Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It's a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two.

Baker: "If the economy remains weak, the deficit will remain a serious burden no matter how much we raise taxes or cut spending." In a March 25, 2009, Huffington Post blog post, Baker stated:

There is no guarantee that President Obama's policies will be successful in restoring strong growth, but they are clearly a step in the right direction. If we have strong growth, then our deficits will be manageable. If the economy remains weak, the deficit will remain a serious burden no matter how much we raise taxes or cut spending.

Someone has to tell the deficit hawks that their blow-up doll is not real. The issue is the economy, not the deficit.

Economics professor DeLong: 1937-38 interruption in recovery attributed to decision to "try to move the budget toward balance." In a November 17, 2008, post on his personal blog, University of California-Berkeley economics professor Brad DeLong wrote, "Private investment recovered in a very healthy fashion as Roosevelt's New Deal policies took effect. The interruption of the Roosevelt Recovery in 1937-1938 is, I think, wel [sic] understood: Roosevelt's decision to adopt more 'orthodox' economic policies and try to move the budget toward balance and the Federal Reserve's decision to contract the money supply by raising bank reserve requirements provide ample explanation of that downturn."

Posted In
Economy, Budget
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