[Vision2020] America’s Sea of Red Ink Was Years in the Making

[Chasuk]

http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html?_r=2

June 10, 2009
By DAVID LEONHARDT

There are two basic truths about the enormous deficits that the
federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is
responsible for only a sliver of the deficits, despite what many of
his Republican critics are saying. The second is that Mr. Obama does
not have a realistic plan for eliminating the deficit, despite what
his advisers have suggested.

The New York Times analyzed Congressional Budget Office reports going
back almost a decade, with the aim of understanding how the federal
government came to be far deeper in debt than it has been since the
years just after World War II. This debt will constrain the country’s
choices for years and could end up doing serious economic damage if
foreign lenders become unwilling to finance it.

Mr. Obama — responding to recent signs of skittishness among those
lenders — met with 40 members of Congress at the White House on
Tuesday and called for the re-enactment of pay-as-you-go rules,
requiring Congress to pay for any new programs it passes.

The story of today’s deficits starts in January 2001, as President
Bill Clinton was leaving office. The Congressional Budget Office
estimated then that the government would run an average annual surplus
of more than $800 billion a year from 2009 to 2012. Today, the
government is expected to run a $1.2 trillion annual deficit in those
years.

You can think of that roughly $2 trillion swing as coming from four
broad categories: the business cycle, President George W. Bush’s
policies, policies from the Bush years that are scheduled to expire
but that Mr. Obama has chosen to extend, and new policies proposed by
Mr. Obama.

The first category — the business cycle — accounts for 37 percent of
the $2 trillion swing. It’s a reflection of the fact that both the
2001 recession and the current one reduced tax revenue, required more
spending on safety-net programs and changed economists’ assumptions
about how much in taxes the government would collect in future years.

About 33 percent of the swing stems from new legislation signed by Mr.
Bush. That legislation, like his tax cuts and the Medicare
prescription drug benefit, not only continue to cost the government
but have also increased interest payments on the national debt.

Mr. Obama’s main contribution to the deficit is his extension of
several Bush policies, like the Iraq war and tax cuts for households
making less than $250,000. Such policies — together with the Wall
Street bailout, which was signed by Mr. Bush and supported by Mr.
Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in
February. And only 3 percent comes from Mr. Obama’s agenda on health
care, education, energy and other areas.

If the analysis is extended further into the future, well beyond 2012,
the Obama agenda accounts for only a slightly higher share of the
projected deficits.

How can that be? Some of his proposals, like a plan to put a price on
carbon emissions, don’t cost the government any money. Others would be
partly offset by proposed tax increases on the affluent and spending
cuts. Congressional and White House aides agree that no large new
programs, like an expansion of health insurance, are likely to pass
unless they are paid for.

Alan Auerbach, an economist at the University of California, Berkeley,
and an author of a widely cited study on the dangers of the current
deficits, describes the situation like so: “Bush behaved incredibly
irresponsibly for eight years. On the one hand, it might seem unfair
for people to blame Obama for not fixing it. On the other hand, he’s
not fixing it.”

“And,” he added, “not fixing it is, in a sense, making it worse.”

When challenged about the deficit, Mr. Obama and his advisers
generally start talking about health care. “There is no way you can
put the nation on a sound fiscal course without wringing
inefficiencies out of health care,” Peter Orszag, the White House
budget director, told me.

Outside economists agree. The Medicare budget really is the linchpin
of deficit reduction. But there are two problems with leaving the
discussion there.

First, even if a health overhaul does pass, it may not include the
tough measures needed to bring down spending. Ultimately, the only way
to do so is to take money from doctors, drug makers and insurers, and
it isn’t clear whether Mr. Obama and Congress have the stomach for
that fight. So far, they have focused on ideas like preventive care
that would do little to cut costs.

Second, even serious health care reform won’t be enough. Obama
advisers acknowledge as much. They say that changes to the system
would probably have a big effect on health spending starting in five
or 10 years. The national debt, however, will grow dangerously large
much sooner.

Mr. Orszag says the president is committed to a deficit equal to no
more than 3 percent of gross domestic product within five to 10 years.
The Congressional Budget Office projects a deficit of at least 4
percent for most of the next decade. Even that may turn out to be
optimistic, since the government usually ends up spending more than it
says it will. So Mr. Obama isn’t on course to meet his target.

But Congressional Republicans aren’t, either. Judd Gregg recently held
up a chart on the Senate floor showing that Mr. Obama would increase
the deficit — but failed to mention that much of the increase stemmed
from extending Bush policies. In fact, unlike Mr. Obama, Republicans
favor extending all the Bush tax cuts, which will send the deficit
higher.

Republican leaders in the House, meanwhile, announced a plan last week
to cut spending by $75 billion a year. But they made specific
suggestions adding up to meager $5 billion. The remaining $70 billion
was left vague. “The G.O.P. is not serious about cutting down
spending,” the conservative Cato Institute concluded.

What, then, will happen?

“Things will get worse gradually,” Mr. Auerbach predicts, “unless they
get worse quickly.” Either a solution will be put off, or foreign
lenders, spooked by the rising debt, will send interest rates higher
and create a crisis.

The solution, though, is no mystery. It will involve some combination
of tax increases and spending cuts. And it won’t be limited to
pay-as-you-go rules, tax increases on somebody else, or a crackdown on
waste, fraud and abuse. Your taxes will probably go up, and some
government programs you favor will become less generous.

That is the legacy of our trillion-dollar deficits. Erasing them will
be one of the great political issues of the coming decade.