GREAT_AMERICAN asked:


Deficit Deceptions
By INVESTOR’S BUSINESS DAILY | Posted Friday, June 15, 2007 4:20 PM PT
Journalism: President Bush has been criticized unmercifully by politicians of all stripes and media of all types for failing to rein in federal spending and letting deficits “soar.” But is the criticism fair?
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The answer, in a word, is no. It’s fashionable these days, for Democrats and even some Republicans to style themselves as “fiscal conservative” to advocate the end of government red ink.
Some of them mean well, to be sure. Certainly, no one wants to see a budget deficit forever — or one that expands to a point that it impairs our government’s ability to function.
But we’re so far from that right now it’s easy to think those who push for the immediate elimination of the deficit have another agenda entirely. Unfortunately, it’s hard to have a rational conversation about it. It never comes down to facts, of which there are plenty, but to fears, of which there are always more.
Let’s start with facts.
Last year, the deficit hit $248 billion. Sounds like a lot, but in a $13.6 trillion economy, it’s not. It’s the equivalent of a $900 dollar credit card charge for someone with a $50,000 income.
As a share of GDP, the budget deficit last year was 1.9%. That’s down from 3.6% in 2004 and below the long-term average of 2.5%. This year, says the CBO, the deficit will be about $177 billion, or 1.3% of GDP. If current trends continue, the deficit will be erased by 2010-2012 at the latest.
By the way, those “surpluses” in the final years of the Clinton administration were a fluke. If you don’t believe it, go back and look at the Clinton administration’s own forecasts. They never saw the surpluses or record tax revenues coming.
They were a creation of an unusually powerful upswing in the economy, pushed by a number of factors: Fed interest-rate cuts, the advent of the Internet and the boom in Big Box discount retailers, such as Wal-Mart. It was a perfect storm of economic growth.
Those who accuse President Bush of “spending” the surpluses and creating “soaring” deficits miss the point. Bush took office just as both the stock market and the Internet boom were collapsing, taking the economy with it. As we’ve noted before, the stock market alone suffered losses of more than $7 trillion. The negative wealth effect from that hit alone was enough to tank the economy.
The year 2001 was one of both recession and a major terrorist attack on our nation, which killed 3,000 people and destroyed hundreds of billions of dollars in potential output.
Let’s go to logic 101: Given such a situation, what should Congress and the president do? Sharply cut spending to ensure that the deficit remains small, and risk sending the economy into a tailspin?
Or keep spending, and maybe even increase it a bit, knowing full well that any discretionary spending that was made today can be cut tomorrow?
No, we don’t like pork-barrel spending. Nor do we like big government, an issue we’ve written much on in the past.
That said, does the spending of the past six years really constitute unusual “big government?” We would argue, no. Using the most meaningful measure of the size of government — spending as a share of GDP — we see that in fact we’re today right where we were in 1996 — about 20.3% of GDP. And it’s declining. This year, spending as a share of the economy is expected to fall to 19.9% of GDP.
If you look at the chart, you’ll note that’s actually below the average of 20.7% of GDP since 1970. Spending boom? Hardly.
Then where did the deficits come from? As we noted, the economy’s decline in 2001 had a far bigger fiscal impact than first thought. Revenues in 2000 were 20.9% of GDP; by 2004, they had plunged to 16.3% of GDP, lowest since 1959. This year, revenues returned to 18.6% of GDP, above the long-term average of 18.2%.
So it was falling revenues, not higher spending, that caused the deficit. It may well be that by keeping spending within its normal range as a share of the economy, Bush kept a mild recession from becoming a very nasty one.
For those who argue the deficit is such a bad thing that we need to raise taxes to get rid of it, this too is wrong.
As Nobel-winning economist Edward Prescott has noted, workers are highly sensitive to tax rates. They work and earn more when rates fall, less when they rise. It’s common sense.
That was the choice President Bush faced in 2001. Keep spending money during a time of extraordinary uncertainty, and cut taxes. Or do nothing or even boost taxes and risk the consequences. Given the current five-year boom we’re in, he chose wisely.
As we noted before, an extensive analysis by the Heritage Foundation found President Bush’s tax cuts each year boost real GDP by $75 billion, employment by 709,000 and real personal income by $200 billion. The benefits are huge and ongoing.
Are we Pollyannas about deficits? Not at all. Long term, we agree there’s a problem. It’s a result of entitlement spending. If we don’t control that, we’re in big trouble. In just the next 10 years, Medicare and Social Security costs will jump from 8.5% of GDP to 10.7%, as 76 million baby boomers start to retire. We have to fix that — something, by the way, Bush tried to do but got little help.
Still, we’ve had deficits in 24 of the past 27 years. During that time, real GDP has grown 122% to $11.5 trillion, 46 million new jobs have been created, bank interest rates have fallen from almost 20% to about 8%, 42 million new homes have been built and per capita incomes have almost tripled.
In short, none of the dire things predicted about deficits came to pass. We’re the wealthiest country in history, and we’re putting more distance between us and our nearest competitors each day.

Dylon