Silliness on the Budget Deficit

The coverage of the debate over the recent budget numbers has been painful. The arguments on both sides have been far removed from reality. The media should have put in the effort to bring the issue back to earth.

First, the White House's claim that the recent growth in revenue show that the tax cuts have somehow paid for themselves, by increasing growth, is laughable. If we go back to 2001, before the economy had the benefit of President Bush's tax cuts, CBO projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. (CBO's growth projections are constructed to average in the effect of recessions, so the 2001 recession should not affect this story. Furthermore, even the White House's growth projections do not show the economy ever catching up to the path projected by CBO in 2001. In other words, the White House's economists don't believe that the tax cuts have had any substantial impact on growth.)

Getting to tax revenue, CBO's projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation) than the White House's latest figure. In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path. Users of arithmetic know that the tax cuts did not come anywhere close to paying for themselves.

The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. There is always a large random component to tax collections. Arguing about the budget situation based on these random fluctuations is like drawing conclusions on global warming based on yesterday's weather.

On the other side, the claim by Democrats that Bush is bankrupting the country are also a bit hysterical. The deficit is larger than it should be, and giving tax breaks to the rich was not the country's most pressing need, but the current deficit is not that large by historic standards. (By the way, it would be more honest and help the hysteria case if the Democrats started using the on-budget deficit, which adds in the $195 billion borrowed from Social Security.)

The reason why the hysteria on the deficit seems so misplaced is that the current account deficit is so much larger. It was running at an $834 billion annual rate in the first quarter of 2007, nearly three times the size of the unified budget deficit and more than 50 percent larger than the on-budget deficit. Of course, the villain in the case of the current account deficit is the high dollar policy that had its origins in the Clinton-Rubin era. This fact makes the current account deficit less interesting to Democrats, but doesn't change the extent to which it should concern economists or people interested in doing serious reporting on the economy.

--Dean Baker

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