EPI News

Straight talk on the federal budget deficit

Some little-known facts about the federal budget deficit: It grew slower than was expected just a few months ago, stimulus spending accounts for only a small sliver of its total, and the leading health care reform proposal would provide coverage for most uninsured Americans without adding a penny to its total. Although the federal deficit is commonly dangled as the reason to block further public investment or comprehensive health care reform, that argument ignores some basic truths about the deficit.

On August 25, the White House released an updated estimate of the federal budget deficit, which shows it now totals $1.6 trillion or 11.2% of GDP. This is $262 billion less than what was estimated in May. The Congressional Budget Office showed a smaller improvement. In anticipation of that release, EPI produced a series of reports (see below) examining the roots of the deficit and the potential impact that health care reform would have on it.

Don’t blame Obama
For all the criticism President Obama has received for running up the deficit, it turns out that Obama’s policies have been a very small factor in the expansion of the federal budget deficit. Bush-era policies, including aggressive tax cuts and spending on the wars in Iraq and Afghanistan, have added significantly more to the total.

In The 2009 Budget Deficit: How Did We Get Here? EPI’s Research and Policy Director John Irons notes that George Bush inherited a budget surplus in 2001. Irons and a team of researchers parsed the data to show that 42% of the $2 trillion reversal of fortunes since then reflects Bush-era policies. Another 42% of that $2 trillion reflects the impact of the recession on tax revenues and spending on programs such as unemployment insurance. By contrast, the American Recovery and Reinvestment Act (ARRA), which so often is blamed for the growing deficit, accounts for just 7.6% of the total.

Irons sums up his findings in the analysis Roots of Deficit Pre-Date Obama, where he notes that Bush-era tax cuts combined with revenues lost during the current recession will produce a level of federal revenue in 2009 which, as a portion of GDP, is the lowest since 1950. “An economic downturn will automatically create deficits because job loss and income declines reduce tax revenues, and because they create more demand for public services such as unemployment, nutrition assistance, and increased Medicaid spending,” Irons writes.

Health care reform and the deficit
Economist Josh Bivens, meanwhile, notes in Reform We Can Afford that efforts to block health care reform out of fear of the swelling deficit are misguided for a number of reasons, mainly because the House bill outlines ways to fully pay for the reforms it proposes, meaning that it would provide health insurance to the majority of Americans who do not have it, without adding to the deficit. The reform bill also ends a longstanding budget gimmick that projects steep cuts in Medicare reimbursement rates and then rescinds them at the last minute. Including those costs, which have really been in the budget all along (though largely disguised), would result in the reform bill adding about $239 billion to the deficit over the next 10 years. To put that figure in context, it is roughly 15% of the cost of the tax cuts passed during the Bush administration, or 25% of the cost of spending on wars in Iraq and Afghanistan to date, Bivens notes.

Numbers aside, Bivens makes the point that a philosophical opposition to spending that could increase the deficit is as misguided as, say, an opposition to borrowing money to buy a home or pay for a college education. During an extremely steep economic downturn, curtailing spending to protect the deficit is especially foolhardy. “Green eyeshades just have no place at all in current economic debates,” Bivens writes. “The U.S. economy has lost 6.7 million jobs in the past 19 months as private spending has collapsed. Literally the only thing keeping another economic depression at bay has been the very large rise in the federal budget deficit…. Normally, it would be considered a bad idea to dump a bucket of water on your living room rug. When that rug is on fire, however, it’s not just a good idea, it’s absolutely necessary.” Indeed, EPI’s recent report The Recovery Package in Action by Irons and Policy Analyst Ethan Pollack outlines how spending made this year under the Recovery Act has been integral in stopping the economy from going into “a full-blown nose dive.”

Replacing No Child Left Behind
EPI Research Associate Richard Rothstein recently published a piece in Education Week magazine outlining some of the recommendations made by the Broader, Bolder Approach to Education campaign for providing students a well-rounded education that would help them succeed in life, rather than just on standardized tests. Rothstein’s opinion piece is available on EPI’s Web site.

In the news
As a debate heats up over whether an economic recovery is underway, a number of news stories discussing the persistently weak job market quote EPI. An Arizona Republic story cites EPI data showing that the United States has lost virtually all the jobs gained since the last recession ended in 2001. A Seattle Times story quotes EPI’s analysis on the high ratio of job seekers to job openings. EPI Vice President Ross Eisenbrey was interviewed for a Nightly Business Report story on the same topic. Eisenbrey pointed out that large numbers of unemployed have not received unemployment insurance, or will soon exhaust those benefits.