Where did the mammoth US budget deficits come from?
Let's go back about a decade, when budget surpluses were predicted for the foreseeable future. Somehow, the math went terribly wrong, by trillions of dollars. Here's an accounting of what happened.
What’s the cause of the federal government’s huge budget deficits? That’s a question that is harder to answer in the particular than you might think. The general problem is obvious: Uncle Sam has been spending more money than he takes in. The specific reasons as to why this state of affairs exists are a mix of human decisions, economic circumstance, and the cumulative effect of time.Skip to next paragraph
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Context is important here. So let’s start with 2001. That year, the Congressional Budget Office looked out over the decade to come and saw ahead nothing but blue skies and black ink. It predicted that between 2001 and 2011 the US would run budget surpluses totaling $5.6 trillion.
That didn’t happen. Instead, the US racked up $6.1 trillion in deficits over that period. CBO’s prediction was a whopping $11.7 trillion off the mark. How did things go so wrong?
CBO has gone back and studied that, as it happens. In a paper published earlier this year, the group’s economists tried to pull out and compare the reasons for the multitrillion swing.
One big problem was that CBO isn’t magical. Unblessed with the ability to predict the future, it didn’t accurately foresee the economic troubles of coming years, including the crash of the Great Recession. This meant that less tax money came in than anticipated. Overall, CBO says that about $3.3 trillion of its $11.7 prediction error can be attributed to “economic and technical changes” to projected revenues.
Then there were the tax cuts. President George W. Bush instigated most of these, but President Obama also pushed through Congress a payroll tax cut intended to pump money into a moribund economy. Tax cuts accounted for a further $2.8 trillion of the $11.7 trillion discrepancy. (Yes, the big kahuna here is Mr. Bush’s 2001 reduction in income-tax rates, which alone accounts for about $1.2 trillion in revenue foregone over the decade.)
Finally, there are the increases in outflows unpredicted by CBO. Between 2001 and 2011, increased discretionary spending amounted to about $3 trillion. This category includes defense spending related to the wars in Iraq and Afghanistan, homeland security upgrades in the US, spending on food stamps and other hard-times safety net programs, and other general budget categories that are supposed to be approved annually by Congress.
Mandatory spending – a category that includes the Medicare prescription-drug program approved under Bush, the TARP bank bailout, and Mr. Obama’s economic stimulus package – went up by about $1.4 trillion during the period in question. (This type of outflow is called “mandatory” not because we had to do it, but because it results from formulas established by Congress instead of appropriated dollar totals.)
Charles Blahous, a former economic official in the Bush White House who is currently a Hoover Institution research fellow, has rolled all these numbers together into a simple pie chart. His answer to the question “where did the $11.7 trillion go?” is this: 27 percent went away due to projection inaccuracy; 24 percent went to tax cuts; and 49 percent can be accounted for by various forms of increased spending.
Yes, yes, but who’s to blame? It’s election season, after all, and accusations as to which party is responsible for most of this damage are as thick on the ground as October leaves after a windstorm. Asked why the debt has increased during his four years in office during a “60 Minutes” interview last week, Mr. Obama pointed a finger at his predecessor: