Say the words “budget deficit,” and Republicans and Democrats begin screaming at each other about who’s to blame.
Republicans howl that the deficit is President Obama’s fault, because he has exploded government spending and failed to fix the economy.
Democrats roar that President Obama inherited a catastrophic economic mess, that this mess will take time to clean up, and that our massive deficit is therefore President Bush’s fault.
So, who’s right?
Let’s start by looking at the deficits under Presidents Bush and Obama. Then we’ll figure out what has caused them. Finally, we’ll assign some blame.
First, the chart below shows the progress of the annual deficits under Presidents Bush and Obama.
President Bush, you will recall, inherited a budget surplus (the first in decades). Then, hit with a recession, he took the budget into deficit. Then he cut taxes, growing the deficit to $400 billion a year. Then, the economy boomed between 2005 and 2008, reducing the deficit to $200 billion a year. Then, the financial crisis hit, and the Bush deficit ballooned to $400 billion again.
In early 2009, President Obama took over, amid the worst recession since the Great Depression. Obama signed an $800 billion spending increase at the same time that GDP and tax collections tanked. The combination of these two factors–growth in spending and a drop in revenue–exploded the deficit to $1.4 trillion. In 2010 and 2011, the economy and tax collections improved modestly, and the deficit shrank to $1.3 trillion annualized.
So, what actually caused these deficits?
The chart below provides a look at federal receipts (taxes) and spending during the same period. (The deficit is the difference between them).
Republicans howl that President Obama has exploded the size of federal government spending in his short tenure as President, and it is true that he has increased it. But President Bush actually increased federal spending by more than 2X as much as Obama has. So it is unfair to lay the explosion in spending at the feet of President Obama: Both presidents are responsible.
The increase in government spending, meanwhile, is actually NOT the only factor that has caused the deficit. The other factor–equally if not more important–is the fall-off in government revenue (tax receipts).
This second and larger factor can be blamed on two things: First, the Bush tax cuts, which reduced revenue, and, second, the weak economy, which reduced the incomes and capital gains upon which most federal taxes are based.
In the chart below, you can see what happened to both federal receipts (red line) and spending (blue line) over the past decade.
President Bush cut taxes in 2001 and 2003. These tax cuts hit federal revenue, while federal spending growth continued apace. This combination ballooned the deficit in the early years of the Bush presidency.
By the middle years of the Bush presidency, however, on the strength of the housing boom and strong economic growth (much of which now looks like a debt-fuelled mirage), federal revenues began to grow rapidly. By 2007, in fact, the gap had almost closed.
But then the bottom fell out. The housing bubble burst, the financial crisis hit, and the economy plunged into recession. And then President Bush handed President Obama the worst recession in more than 70 years and left Obama to clean up the mess.
This recession clobbered federal revenues (tax receipts–red line), which have only just regained their 2007 bubble highs. President Obama’s stimulus, meanwhile, helped add about $600 billion to federal spending (blue line). The combination of these two factors ballooned the deficit from $400 billion when President Bush left office to ~$1.3 trillion now.
So, who’s responsible for the massive deficit?
This is a tougher question.
We know WHAT is responsible: The combination of tax cuts, weak government revenues (tax receipts), and a vast increase in government spending.
But figuring out WHO to blame is a more subjective exercise.
If you believe that the growth during the “Bush Boom” was a debt-fuelled mirage–a theory that is certainly supported by the evidence–then you can lay the blame squarely at the feet of President Bush. His combination of reduced taxes and increased spending took the US from a surplus to a deficit, and even the economic boom from a massive housing bubble and enormous borrowing couldn’t close the gap.
Even if you think the “Bush Boom” was real, moreover, the recession and financial crisis began on his watch, and the deficit was already exploding when President Obama took office. So it’s very hard to escape the conclusion that President Bush bears a lot of the responsibility for our current mess.
On the other hand, President Obama’s stimulus certainly hasn’t had as big an impact on the economy (and, therefore, government revenues) as he and his advisors thought it would. Given the extent of the mess Obama inherited, it’s possible that nothing would have fixed the economy by now. But even huge Obama supporters are justifiably frustrated with his over-promising, as well as with many of the decisions he has made.
So it seems fair to lay some of the responsibility for our current deficit at President Obama’s feet as well.
But, of course, if we’re doling out blame, we need to bring two other parties into the conversation.
First, Congress, which approved all of the decisions above.
Second, us–the American citizenry–the folks who voted Presidents Bush and Obama and Congress into office.
We cheered as President Bush and Congress ignited the housing bubble. We cheered as they cut taxes and increased spending (it’s just so marvellous to have it all). We cheered as President Obama and Congress approved the stimulus and extended the Bush tax cuts. And we’re cheering now as Republicans promise us that–if only we just cut taxes and spending–our problems will be solved. (Never mind the examples of Greece and the UK, which demonstrate clearly that enacting “austerity” in the midst of a fragile recovery doesn’t work).
In short, we’ve all become accustomed to our free lunch, and we never tire of electing politicians that promise it to us.
So if we want to know who’s really to blame, we should take a peek in the mirror.
Business Insider Emails & Alerts
Site highlights each day to your inbox.