Sunday, May 15, 2011

Debt and Deficit Realities

Too many people think that the projected deficits of the coming decade are the fault of the policies of President Obama and the Democratic Congress in 2009 and 2010. But the economic downturn, the Bush tax cuts, and the unfunded wars in Iraq and Afghanistan, all of which started before Obama even took office, account for virtually the entire deficit over the next ten years.

Before Obama's inauguration, the deficit for 2009 was already projected at well over $1 trillion. In December of 2008, the National Bureau of Economic Research pegged the start of the recession as December of 2007.

The Troubled Asset Relief Program, enacted in October of 2008, and the rescue of Fannie Mae and Freddie Mac in September of 2008 also contributed $250 billion to 2009's record deficit. However, the contribution to deficits for 2010 and beyond fade quickly. The American Recovery and Reinvestment Act of 2009 (the stimulus package), along with other temporary measures such as an increase in aid to states, account for 1.4 trillion of the deficits, mostly for 2009 through 2011. But the stimulus bill, the financial rescues, and other recovery measures will contribute little to future deficits.

Figure 1: The deficit, 2009 through 2019

The recession drove down tax revenues and drove up spending for unemployment insurance, food stamps and other safety-net programs. The recession accounts for $400 billion of the deficit each year in 2009 through 2011, with slightly smaller amounts for subsequent years.

The Bush tax cuts (if continued) and the wars in Iraq and Afghanistan will account for nearly $10 trillion of debt by 2019, according to the Center on Budget and Policy Priorities, based on figures from the non-partisan Congressional Budget Office.

Allowing the Bush tax cuts to end as scheduled would alone stabilize the debt to GDP ratio at about 73% (it is currently about 69% for 2011). This assumes also that we let the payroll tax holiday end so that more money from general revenues is not put into the Social Security Trust Fund.

Health care costs are also rising faster than inflation. A single-payer system such as that used in many other western countries to contain costs seems to be off the table, so other measures must be found to address the rise in costs of privately run insurance and of health care. The 2003 Medicare prescription drug benefit, with its prohibition against negotiating of drug prices, also contributes to the debt. One simple way to forstall some of the increase in costs would be to allow drug price negotiation.

Ending Bush's two wars and reducing military costs (we have 174 bases in other countries) will also help to lower the national debt.

The GOP wants more tax cuts for businesses, and they and the Tea Partiers want the Bush tax cuts to continue, both of which would contribute significantly to rising debt levels. The GOP also refuses to look at reversing the cuts in taxes on capital gains and "qualified" dividend income, both of which are currently at 15%. Just counting those as regular income would go a long way toward reducing the debt.

Continuing to blame the national debt and the huge deficits on Obama, on social spending, on government regulations and oversight and environmental policies, on high taxes on the wealthy and other "job creators," and on mythical freeloaders of a welfare state, is partisan politics with no basis in reality. Unless conservatives, including Blue Dog Democrats and Tea Partiers, get serious about the real causes and solutions to the debt crisis, we will continue to see only agenda-driven legislation. These do little to address the continued deficits, and instead will only continue to hurt the vast majority of Americans, including short- and long-term unemployed and underemployed people, low-income workers, the poor, children, the elderly, the sick, as well as ordinary middle-class working families.

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