Federal Deficit – The Ugly News
Just a quick note. The Congressional Budget Office published their estimate of the Federal deficit for the fiscal year just ended. The details are sparse, but the news is ugly. Given what we know so far the deficit will come in at around $1.4 trillion for fiscal year 2009. That’s awful. It represents an astounding 9.9% of GDP which makes it the largest deficit, proportionately, since 1945. So in a year of records, most of them unwanted, we can chalk up another.
Both sides of the Federal ledger have been hammered – there was no single cause for the deficit. Except of course for the recession.
The CBO estimates that spending rose about 17.8% year on year. Three culprits can readily be identified: TARP, which contributed an increase of $154 billion; support for Freddie Mac and Fannie Mae, which added $91 billion; and the stimulus plan which has added over $100 billion so far in spending.
Revenues dropped drastically too: personal income tax receipts fell $230 billion, or 20.1%; while corporate income tax receipts fell $166 billion, or over 54%. Overall revenues were down about 16.6%, from $2.5 trillion to $2.1 trillion.
What do we make of this?
Well I think we shouldn’t panic.
These are indeed terrible numbers if they were sustained over a few years. They highlight the need longer term for policy changes to control spending and increase revenues. I have said it before: there are tax increases down the line. Having said that, we should not imagine that future deficits will be anything like last year’s. There are massive extenuating circumstances. As there should be in a recession. Tax revenues are very sensitive, obviously, to employment levels and profits. It is no surprise that receipts have shrunk dramatically. But they will naturally increase, also dramatically, as the recovery gathers momentum [if it does]. Similarly 2009’s spending is an aberration: we layered on a huge one time stimulus plan, and we have had to finance the bail out of the failure of our banks to manage themselves as adults. The budget was hit by a near ‘perfect storm’ of fiscal maladies. Add in the increase in the costs of government programs that are supposed to be natural ‘counter-cyclical’ measures – things such as unemployment assistance – and it is easy to understand why the deficit mushroomed the way it did.
Now is not the time for fiscal conservatism. Nothing could be more damaging to the economy than an attempt to get the budget back into balance. As I have siad here many times: the private sector has collapsed in our economy, without government spending we would almost certainly have fallen into the abyss of a fully fledged Depression. The cost of avoiding that dire result is the current deficit. The cost of going into the abyss would have been far, far greater.
Plus not all the deficit is attributable to the current crisis. We had opened up a structural deficit previously. Those failed Bush tax cuts knocked a hole in tax receipts, but the then Republican administration failed to cut spending. On the contrary it added hugely to spending. The failed Medicare legislation is a good case in point: by biasing that extension of care in favor of the health insurance and drug industries the Bush administration deliberately added several hundred billions of expenses to the program’s cost. This was after having cut revenues. It was an act of fiscal recklessness we had not seen since Reagan. Recall it was Reagan who set us on this path of fiscal imbalance: he also failed to rein in spending. It is an irony of epic proportions that the two worst offenders with respect to fiscal wantonness were the two most conservative presidents of the modern era. Long gone – or should be – is the notion that the Republican party is the party of sound fiscal management. Their efforts to destabilize the Federal government, what they called ‘starving the beast’ was always half hearted. they could easily sell the tax cut half. But they always lacked the political courage to sell the spending cut half. They refused to rein in defense spending, and they avoided coming clean on their desire to eliminate the entitlement programs that comprised a large part of the rest of the budget. They realized that Americans actually like those entitlements. So the GOP was reduced to a one dimensional and therefore dishonest and reckless manager of our national finances.
The echo of that dishonesty is still with us: are large part of the current deficit has nothing to do with the crisis, bail outs or the stimulus. It is the result of the Reagan/Bush ideological attack on government. That we have yet to clean up that mess is lost within the larger story. The failure of the entire GOP ideological enterprise – that free market mentality – has left future generations an expensive burden. Today’s CBO report merely outlines this year’s accounting of that failure.
