Keith Hennessey:
It is true that 10 years ago we had a budget surplus of more than $200 billion, and that CBO projected surpluses “stretching out toward the horizon.” When CBO built its budget baseline for 2001, they had not yet accounted for the bursting of the late 90’s tech stock market bubble and the effect it would have on federal revenues. Like families, businesses, and investors, CBO made a mistake: they projected future revenue growth that was never going to occur. Critics of the Bush Administration hinge their comparative argument on this single mistaken budget projection which in hindsight analysts from both parties acknowledge was wildly inaccurate.
It is also true that President Bush proposed, and in 2003 the Congress passed and President Bush signed into law, a Medicare drug benefit that was not offset by other spending cuts or tax increases. It is true that this benefit significantly increased the already large unfunded liabilities of Medicare.
What the Democratic critics fail to mention is that the Democratic alternative proposal cost significantly more than the Bush proposal and the enacted law. (This predates Mr. Obama’s time in the Senate.)
What Republican critics fails to mention is that in the late 1990’s a Republican-majority House of Representatives passed a Medicare drug benefit without offsetting the proposed spending increases. Senate Republicans offered their own version on the Senate floor, which again was smaller than the Democratic alternative. By the time then-Governor Bush began his Presidential campaign, there was a broad bipartisan Congressional consensus to create a universally subsidized prescription drug benefit in Medicare without offsetting the proposed spending increases. Bush joined that consensus and enacted it into law. Fiscal conservatives should direct their anger principally at House and Senate Republicans of the late 90’s. (I worked in the Senate then, so I get blamed either way.)
It is true that President Bush proposed, and in 2001 and 2003 the Congress passed and President Bush signed into law significant tax cuts, and that those tax cuts were not offset by spending cuts or tax increases. If President Obama believes that enacting these tax cuts without offsetting their deficit impact was profligate, then why is he proposing to do the same thing? His budget proposes to change the law to extend all of the Bush tax cuts except those Team Obama mislabels as “for the rich.” He is not proposing offsets for those tax cuts he would extend. It is inconsistent to argue that Bush was irresponsible when he did it, and that Obama is responsible when he does the same thing.
Given my concessions, it must be true that the 00’s were a decade of profligacy, and that President Obama’s policies will “restore fiscal discipline in Washington.” Right?
Comparison
Let us examine the results of these so-called “profligate” policies during the Bush Administration, and let’s compare them to the deficits proposed by President Obama. I will compare eight-year Presidential terms rather than decades. In doing so I will assume that President Obama gets a second term, and that the budget he proposed yesterday is enacted exactly as proposed.
When doing this comparison one has to struggle with how to treat fiscal year 2009, which began October 1, 2008 and ended September 30, 2009. A traditional comparison would assign budgets for FY 2001 through FY 2008 to President Bush, and for FY 2009 through FY 2017 to President Obama, since usually the bulk of the laws signed in FY 2009 would be signed by President Obama.
But this would assign all the “blame” (deficit impact) of TARP to President Obama. I am therefore going to calculate deficits for President Bush including FY 2009, as those deficits stood on January 20, 2009 when he left office. In doing so, I am assuming the overwhelming majority of the TARP spending and their deficit “blame” to President Bush, even though he committed only half the $700 B TARP. In other words, I am skewing my analysis to be as generous as possible to President Obama in the comparison with President Bush. (Update: See below for a caveat on the light blue Obama bar, which also includes all of 2009.)
Here are the average budget deficits measured as a percent of GDP. As always, click on any graph to see a larger version.
You can see that budget deficits during President Clinton’s eight years averaged 0.8 percent of GDP. Clinton folks will tell you this is because of his brilliant policies, and in particular the 1993 budget law. I think most of it is the result of tech bubble-induced higher capital gains revenues causing total taxes to surge to record levels. We can have that debate another time.
Jonathan Chait at TNR:
Here’s what actually happened.
As budget surpluses appeared in the late 1990s, some level of giddiness crept into the thinking of both parties. But it was the right that went completely overboard. Conservatives were writing books like “Dow 36,000” and insisting prosperity would last forever. You might think it’s odd that the right would be hyping prosperity during a time when a Democrat held the White House. But the giddiness had a political purpose: it was useful to disarm Democratic fears that tax cuts might weaken America’s fiscal position.
In 2001, when the Bush tax cuts were being debated, liberals and Democrats warned over and over again that CBO’s forecasts could prove ephemeral. TNR editorialized,
it is true that the budget has produced pleasant surprises for several years running. But the proper lesson to take from this is not that budget projections are always too conservative–indeed, historically they’ve usually erred on the side of optimism–but that they’re not very accurate.
Paul Krugman warned about the possibility in his book, Fuzzy Math: “If the ‘new economy’ turns out to have been a sprinter rather than a marathon runner, the CBO’s projections of revenue will turn out to be greatly exaggerated.’
Republicans successfully dismissed such fears. They insisted that the CBO, run by musty old Keynesians who failed to appreciate the wonders of the dynamic new economy, was dramatically understating the surplus. “Economist Lawrence Kudlow has been the nation’s most accurate fiscal prognosticator of the last decade,” wrote Stephen Moore, “and he estimates tax surpluses will be twice as large as the official forecast.” They further proclaimed that the Bush tax cuts would unleash even more growth, meaning that the CBO forecasts must be too pessimistic. Martin Feldstein testified, “The true cost of reducing the tax rates is likely to be substantially smaller than the costs projected in the official estimates.” In his 2001 State of the Union speech advocating tax cuts, Bush cleverly spoke as if the surpluses had already materialized, and the proceeds been salted away:
We have funded our priorities. We paid down all the available debt. We have prepared for contingencies. And we still have money left over.
The Bush administration furiously and successfully beat back Democrats’ attempts to inculcate caution and modesty about the projected surpluses. To cast the administration as victims of a “mistake” requires a a staggering level of chutzpah.
Hennessey responds:
Argument: Mr. Chait writes, “To cast the Administration as victims of a ‘mistake’ requires a staggering level of chutzpah.”
Response 1: If I created the impression of victimization, I apologize. Yes, the tax cut and the post-9/11 spending increased the budget deficit relative to what it otherwise would have been. So did the wars in Iraq and Afghanistan and the Medicare drug benefit. The Obama Administration suggests, however, that the entire decline in the surplus was the result of policy decisions. That is clearly incorrect. CBO said that 40% of the surplus decline from 2001 to 2002 was the result of forecasting error and a failure to predict the recession. The other 60% was the results of policy choices by President Bush and the Republican Congress, most importantly the tax cut.
Response 2: There was a significant forecasting error that overestimated projected surpluses. Mr. Chait suggests I claimed the Bush Administration was “blindsided.” My argument is a little different. Given that we now know that the January 2001 economic and surplus projections were wrong, it is misleading for Team Obama to use those knowingly incorrect projections to describe the effects of Bush Administration policies.
Response 3: These were not just budget surpluses, they were surplus revenues. When President Bush took office there were budget surpluses largely because taxes far exceeded their historic average. In 2000 taxes were 20.6 percent of GDP, more than two percentage points higher than the historic average. That same year the budget surplus was 2.4 percent of GDP. The budget surpluses existed mostly because the government was taking much more from the private sector than it had historically taken.
Response 4: Three things can be done with a dollar of surplus: return it to the taxpayers, use it to pay down debt, or increase spending on a government program. Team Obama and its allies suggest that if we had not cut taxes and the surpluses had remained in Washington, then all these surplus revenues would have been used to pay down debt. I think it’s far more likely that Congress would have figured out ways to increase government spending (yes, sadly even with Republican Congressional majorities). For me tax cuts vs. debt reduction is a tough call. Tax cuts vs. (an uncertain mix of debt reduction and government spending increases) is a much easier choice.
Response 5: President Bush campaigned on tax relief. He won. He fulfilled his campaign promise and enacted tax relief, in part contributing to smaller surpluses and eventually budget deficits. In doing so, taxes returned to near their historic levels and budget surpluses got smaller as all income taxpayers kept more of the money they earned. Since I focus on spending as the problem, rather than the balance between levels of taxation and deficits, this shift doesn’t concern me as it might some others. I focus on what I think is our primary fiscal challenge: slowing the growth of government spending.
Jonathan Chait responds:
Here’s the paragraph of Hennessey’s that really gets to the nub of the point:
President Bush campaigned on tax relief. He won. He fulfilled his campaign promise and enacted tax relief, in part contributing to smaller surpluses and eventually budget deficits. In doing so, taxes returned to near their historic levels and budget surpluses got smaller as all income taxpayers kept more of the money they earned. Since I focus on spending as the problem, rather than the balance between levels of taxation and deficits, this shift doesn’t concern me as it might some others. I focus on what I think is our primary fiscal challenge: slowing the growth of government spending.
Here I will permit myself to go beyond factual debunking of Hennessey’s arguments and add some analytical perspective. What Hennessey’s saying here is that he prefers low taxes and low spending. Bush’s deficits don’t bother him all that much because they helped push the composition of the federal budget and the burden of the tax code in a direction he prefers. So, in his previous post he argues that Obama bears more responsibility for deficits than Bush, but his position is not really contingent upon that argument holding up. His deepest belief is that deficits caused by tax cuts are fundamentally okay, and deficits caused by failing to cut spending are not.
This is why the deficit is currently intractable. Hennessey is clearly one of the most responsible Republican economic policy-makers. He doesn’t say that deficits don’t matter or that tax cuts cause revenues to rise. But even somebody like Hennessey is willing to support policies that destroy the country’s fiscal position in order to tilt the level of taxes and spending in a more favorable direction. This is why fiscal responsibility right now is a fool’s errand. Even if Democrats could right the fiscal ship in the face of total GOP opposition — a move that would entail such massive political costs that no sane political party would attempt it — Republicans would just steer it right back off course as soon as they regain power.
Ramesh Ponurru at The Corner:
Keith Hennessey and Jonathan Chait have gone two rounds in an argument about Bush, Obama, and responsibility for current and future deficits. (Here are the links: Hennessey, Chait, Hennessey again, and Chait again.) I think Chait has scored some points, but chiefly on secondary issues, while ignoring Hennessey’s most important arguments.
To my mind these are: 1) “Given that we now know that the January 2001 economic and surplus projections were wrong, it is misleading for Team Obama to use those knowingly incorrect projections to describe the effects of Bush Administration policies.” 2) Bush’s prescription-drug benefit needs to be placed in a political context in which both parties favored a big entitlement expansion without offsetting tax hikes or spending cuts, and in which the Democrats wanted a more expensive entitlement. 3) Obama’s policies increase the deficit compared to pre-existing law.
One possible response to point 2 would be that Bush should have shown more political leadership; but if we’re going to dismiss political constraints we should do so evenhandedly, and Obama’s push to extend some of Bush’s tax cuts has to be counted toward his contribution to the deficit.
Gus Lubin at The Business Insider
Brad DeLong, commenting on Hennessey’s first post
Reihan Salam
UPDATE: Ross Douthat
Around The Sphere 