Fact 16a/7b: Temporary Spending Increases Are Not What Drives Long-Term Budget Deficits

September 26th, 2012 at 2:56 am

You know the old joke about the comedians’ convention?  They all know the same jokes so they don’t tell them, they just give them numbers.  So they stand up and say “19!…8!” cracking each other up (then a new guy yells “6!” and nobody laughs…what’s wrong, he asks…it’s your delivery, they say).

Well, perhaps it would be more efficient to just number the most critical arguments made here at OTE and instead of posting blogs every time they come up somewhere, I could just post the number.

This particular one would get a lot of use.  In a WSJ editorial today, they go after  the President for the increase in the budget deficit over his watch.  When the President correctly points to the actual factors behind the increase in deficit, they accuse President Obama of “…conveniently forget[ing] a little event in February 2009 known as the “stimulus” that increased spending by a mere $830 billion above the normal baseline.”

It’s of course true that the stimulus (no quotes necessary, WSJ–it was real…and it worked) led to higher deficit spending when it was in place.  That’s the point.  In order to offset the private sector contraction, the public sector needs to TEMPORARILY ramp up economic activity, and it must do so with borrowed money (to raise taxes or cut spending to pay for stimulus would be to reverse its impact).

But the key word is “temporary.”  As seen in the figure below (or figure 1 in the link above), it’s not the stuff that gets in and out of the system that hurts you, deficit-wise.  It’s the stuff that stays in and isn’t paid for, like the Bush tax cuts, which continue to be the big story re what’s driving the medium-term budget deficit.

The figure shows Recovery Act spending as a share of GDP, 2009-2019.  It doesn’t go to zero because there are interest costs in the out years.  I’m not claiming that stimulus is a free lunch.  But I’m very much claiming it’s not what’s driving the budget deficit going forward.

Sources: CBPP (h/t: KR), CBO

In fact, as long as we’re being honest, if it were me, I’d say we could use another dose of temporary, deficit-increasing stimulus, particularly targeted at ending (or at least slowing) the layoffs in the public sector.  Call that point 16a/7b.

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4 comments in reply to "Fact 16a/7b: Temporary Spending Increases Are Not What Drives Long-Term Budget Deficits"

  1. Logan Mohtashami says:

    Defense, Social Security, Medicare and Interest on the debt, that is what is eating our revenues.

    Wait until 2022-2050.. that is when the mother ship of mandatory payouts happen.

    Math is Math…. the rest is storytelling

  2. jarrod myrick says:

    it’s not a free lunch, they pay you to eat — run the no-stimulus counterfactuals

    we need much bigger budget, much more revenue, seems to me

  3. Kathryn Crossin says:

    So are there comparable graphs at your site or elsewhere showing the data for the Bush tax cuts or the prescription drug bill? Would be interesting to see side by side.

  4. Andrew says:

    Whenever we talk about the deficit as if it matters, we reinforce the notion that the budget of a monetarily sovereign government is like that of a family. It isn’t. A family can’t make money. It’s also nothing like the deficit of Greece or France that have given up the right to create money.

    The “deficit” is the same as the federally created money supply. It’s a number. That’s all. More money may be good in some situations, and bad in others, but it’s not like we eventually HAVE to pay it off. Heck, you can even think of it as a home mortgage, to some extent. Most people don’t really expect to pay off a home mortgage, it’s just the price you pay for living in your home. It doesn’t really matter if it gets paid off, just that you can make the payments. And the government can ALWAYS make the payments because it can ALWAYS make money.

    People also need to understand that the Fed is independent only in action, not in it being some private for-profit organization. Profits that accrue to the Fed go to the treasury. You can help make this clear to people.