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Call it the $12 trillion misunderstanding.It ranks among the biggest forecasting errors ever.
Back in 2001, the Congressional Budget Office projected federal budget surpluses of $5.6 trillion for 2002-2011. Instead we got $6.1 trillion of deficits — a swing of $11.7 trillion.
Naturally, political recriminations followed. Who or what caused the change? President Bush’s tax cuts for “the rich”? The Iraq and Afghanistan wars? The Medicare drug benefit? The financial crisis? President Obama’s “stimulus”?
Doubtlessly, the question will emerge as a campaign issue. But any intellectually honest answer — perhaps futile in today’s politically charged climate — will admit that no single cause explains the change. We now have evaluations from the CBO and two nonpartisan groups: the Committee for a Responsible Federal Budget (CRFB) and the Pew Fiscal Analysis Initiative. They all point in the same direction.
For starters, a weak economy was the largest cause. The CBO attributes $3.2 trillion of the $11.7 trillion shift (about 27 per cent) to “economic and technical changes.” “We overestimated how good the economy would be, even before the Great Recession,” says Marc Goldwein of the CRFB.
Consider. In 2001, the CBO projected that the economy would grow about 3 per cent a year over the 2002-2011 period. Actual growth from 2002 to 2007 averaged only 2.6 per cent. From 2008 through 2011 — the Great Recession started in late 2007 — growth averaged only about 0.2 per cent annually. Slow economic growth reduces tax revenues and increases spending for jobless benefits and other assistance.
After the CBO issued its report, Sen. Rob Portman, R-Ohio, a former director of the Office of Management and Budget who is often mentioned as a vice-presidential possibility, put out a press release claiming that Bush tax cuts for wealthier Americans (generally $250,000 or more for couples and $200,000 for singles) explained only 4 per cent of the debt shift. The CRFB checked his maths and concluded he was right. But all of Bush’s 2001 and 2003 tax cuts — which, except for benefits for the rich, are now supported by Obama — had a bigger effect, accounting for about 13 per cent of the debt swing.
Together, the weaker economy and 2001-2003 tax cuts explain 40 per cent of the debt shift. Here’s how Pew allocates the rest. Its estimates parallel the CBO’s and the CRFB’s, which either cover slightly different time periods or use slightly different budget categories.
Iraq and Afghanistan wars: 10 per cent
Increases in discretionary domestic spending: 10 per cent
Other increases in defence spending: 5 per cent
Obama stimulus: 6 per cent
2010 Tax Cuts: 3 per cent
Medicare drug benefit: 2 per cent
Other tax cuts and means of financing: 12 per cent
Higher interest costs on larger federal debt: 11 per cent
So, most theories (often partisan) of the $11.7 trillion shift turn out to be wrong, exaggerated or misleading. There were lots of causes; no single cause dominates.
One other thing: even projecting surpluses from 2002 to 2011, the CBO cautioned then that large deficits would ultimately return.
“Over the longer term,” then-deputy CBO director Barry Anderson testified before the Senate Budget Committee in January 2001, “budgetary pressures linked to the ageing and retirement of the baby boom generation threaten to produce record deficits and unsustainable levels of federal debt.”
Unfortunately, that hasn’t changed.
This story was originally published by RealClearPolitics.
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