Monday, July 25, 2011

Whence Came the Deficit?

Uncle Sam, once quite in the black,
Financially fell off the track
Through tax cuts galore,
Recession, and war
In Afghanistan and in Iraq.

The New York Times editorial page gave a lesson in US federal deficit history over the weekend. Countering the notion put forth by Grover Norquist and his Republican pledgees in Congress that the deficit results from "runaway spending" under Obama, the Times demonstrated that a combination of military spending, as well as reduced revenues from lower tax rates and a weak economy, had squandered the surplus left behind by the Clinton administration. The stimulus measures implemented by Obama, though adding to the deficit in the short term, are only temporary.


  1. The New York Times never fails to mention two things regarding the Clinton "surplus":

    1) If one does not count Social Security overpayments, there WASN'T any surplus.
    2) A significant portion of the "surplus" was from the unpredicted capital gains tax windfalls, gained from what we all recognize now as an unprecedented stock market bubble.
    3) Another large portion of the "surplus" could be from the Base Closure and Realignment Act, signed by GHWB, the savings from which came well into the Clinton administration.

    Furthermore, it is false to assert that revenues declined due to lower tax rates. I understand that except FY2003, revenues continued to rise (faster than GDP growth) in spite of, or because of, the tax cuts. This seems to indicate that we were over the hump of the Laffer curve at that point.

    I make no comment regarding the wars' wisdom nor cost. They have, however, proven to be temporary.

    While Obama's stimulus measures are, on paper, also temporary, I do not doubt for a second that his intent will become permanent. It is clear from his rhetoric that he desires a structural enlargement of the public sector (see Obamacare, TAA, etc.)

  2. Well said, and very true! What you said in you limerick ... not Mr. Lawry's comments.

  3. Nonetheless, I welcome any data that would show that my points are not indeed factual.

  4. Sorry for the delayed response, but fact-checking takes some time. The factual rebuttal to your points is contained in the attached CBO presentation on trends in US tax revenues, and in particular the chart on page 12; it demonstrates that, in most years of the GW Bush presidency, revenues fell and outlays increased as a percentage of GDP. This particularly refutes the claim that revenues rose faster than GDP. It also belies the claim that the Clinton surplus was a fluke, since outlays were shrinking and revenues rising throughout his two terms.

  5. The chart on page 12 shows that after 2001 and 2002, there was a bottoming-out of revenue in FY2003, the year the meat of the "Bush tax cuts" were enacted. From FY2004 through FY2007, revenues surged while outlays held stable. This held until the crisis of 2008. Was the overall average still down? Yes. But it's something akin to a house burning down right after you move in, and not quite rebuilt when you leave. Yes, things got worse during your stay.

    As for more subjective reading of these data, I think people give Clinton far too much credit and Bush far too much blame. One can argue from these data that revenues did not start rising for Clinton until 1995, when Republicans whipped him into shape. Rubin was a straight shooter, I'll admit that, though Clinton had the very good luck of an unprecedented internet productivity boom. That I suppose should be credited to Al Gore instead.

    One can also argue that the peak of the revenue cycle strangely seemed to coincide exactly with the tech bubble, the bursting of which occurred as Bush was entering office, not to mention the shocks of late 2001.

  6. Mr. Lawry,
    As you yourself say, revenues were down overall during the Bush years. Even the increase in 2005 was mainly due to capital gains (i.e. speculation, as an article from the time makes clear There is really no point in trying to deny, despite all evidence, that our federal deficit is largely Bush's work.


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