Deficit Reality: Not DC Talking Point

Photograph by Jose Cabezas/AFP/Getty Images

Soldiers of the 4th brigade combat team 4th infantry division of the U.S. Army dispose of waste left by mortar rounds at the Forward Operating Base Joyce, in the Kunar province in Afghanistan on August 20, 2012.

To solve a problem requires knowing that problem: analyzing it, diagnosing it and then treating it. Yet when it comes to the deficit, Washington is woefully ignorant.

A Bloomberg Government study, “What Really Caused the Mounting Federal Deficit”, provides a non-partisan assessment of why the deficit deteriorated from an average of 1.9 percent of gross domestic product per year in the three pre-financial crisis years, to 9.3 percent per year in 2009 through 2011.

The Bush tax cuts and the wars in Iraq and Afghanistan cannot be blamed, nor can stimulus measures taken by the Bush and Obama administrations.

The biggest cause of the 7.4 percentage point deterioration in the deficit was the economy itself, the study finds.

The downturn brought on by the financial crisis was responsible for 4.5 percentage points, or 60.8 percent, of the increase.

Tax revenue went down, and spending on areas such as income support went up.

Only 24.3 percent of  the deterioration was caused by specific stimulus measures, both on the spending and revenue side. The remainder was caused by rising costs that had nothing to do with the economy or stimulus: primarily, defense, Medicare and Social Security.

Politicians from both parties would rather play politics than figure out what caused the problem in the first place. Instead, the U.S. faces a “fiscal cliff” in the new year of sequestration and tax rate increases that few want and which could have disastrous economic effects.

A sensible plan to address the deficit would focus on wiping out the structural deficit and rely on economic growth to address the cyclical deficit. As it happens, the U.K.’s deficit plan is based entirely on this reasoning.

Instead, in the U.S. tax increases have the potential to lower consumer spending, and much of sequestration focuses on areas of the budget that didn’t cause the deficit.

 

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