OPINION:
Today’s enormous federal deficits are not caused mostly by the economy. That’s what the Congressional Budget Office said in an important but overlooked analysis earlier this month. According to CBO, the economy is only accounting for “about a third” of the projected 2012 deficit. This has enormous implications, raising a serious question whether Washington’s budget is as “star-crossed” as thought.
On Oct. 4, CBO released a little-noted letter estimating the economy’s effect on the current federal deficit. “[I]f the economy was operating at its potential level - the projected federal deficit under current law in fiscal year 2012 would be about a third lower, or roughly $630 billion instead of the $973 billion projected.”
There’s a lot to process here - a bit good, but most bad.
Positively, the deficit would be significantly lower were the economy to fully recover. A $343 billion reduction in the deficit is big. Put into context, the congressional bipartisan Joint Select Committee on Deficit Reduction is tasked with cutting the deficit by $1.5 trillion from 2012 through 2021. Were the economy fully recovered over the same time - and we simply applied CBO’s estimated 2012 $343 billion improvement to each of those 10 years (it assuredly would be larger in later years) the deficit would be at least $3.43 trillion lower.
Succinctly, a recovered economy could improve the deficit by well over twice what the government in Washington is aiming to do.
Now for the bad news. According to CBO’s analysis, government’s negative impact on the current deficit is twice the economy’s negative impact on it. Ironically, while a recovered economy could be estimated conservatively to improve the deficit by twice the government’s deficit-reduction target, the government’s negative deficit impact is actually twice what the economy’s is.
This observation is not intended to diminish the deficit-reduction committee’s task. On the contrary, the sums assigned are huge, and the obstacles in reaching them in a short time under intense public scrutiny and in a bipartisan way make the job tremendously difficult. What it shows is how hard the task is and where the problem really lies.
Even were the economy fully recovered and the deficit to reach CBO’s estimated $630 billion, this would be the largest federal deficit on record - except for those racked up during this current economic downturn. It would not just be the largest, but 50 percent greater than the next largest (2004’s $412 billion) - again, disregarding those of this current period. Even discounting inflation’s effects, today’s would still be the largest deficit in U.S. history.
In 2007, before the recession, the deficit was $160.7 billion and just 1.2 percent of gross domestic product - with the George W. Bush tax cuts in place and America engaged in two wars. By 2008, the deficit had almost tripled. By 2009, it was almost 10 times higher. And there it roughly has stayed for three years.
From 2008 through 2011, the federal government has run $4.463 trillion in deficits, averaging $1.116 trillion a year.
The CBO does not calculate how much of these deficits are because of the economy. Undoubtedly, it’s a larger percentage than CBO’s “about a third” estimate for 2012. However, the two-thirds of 2012’s non-economy deficit rightfully causes one to wonder: How much of these record deficits are Washington’s fault and not the economy’s?
The downturn’s hidden danger is that it shields our eyes from the even larger and longer-term danger of government-driven deficits.
We know that as bad as the economy is, it is transitory. It will recover eventually. But when it does, the deficit will fall far less - barely a third, if CBO is correct.
We risk deluding ourselves into absolving the budget deficit because of the economy and, as a result, not holding Washington accountable. The CBO’s report says the economy is having just a minor impact on the deficit. The major impact is, and will continue to be, Washington’s.
Washington’s premise has been that the budget is star-crossed because of the economy. The truth is closer to Shakespeare’s observation in “Julius Caesar”: “The fault, dear Brutus, is not in our stars, but in ourselves.”
J.T. Young has served in the Treasury Department, the Office of Management and Budget and as a congressional staff member.
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