Obama & Deficits

A link in a post on a friend’s blog provoked me into perusing the CBO’s recent analysis of Obama’s budget proposals.  Hence the following graph:

Figure 1 – Deficits 2008-2019 (in billions of $):

obama-deficits1Figure 2 – Debt/GDP 2008-2019 (%):

obama-deficits2Some observations:

  • ARRA (the stimulus) doesn’t account for the bulk of the 2009-2012 deficits.  Nor do the TARP or Frannie bailouts.
  • Most of 2009 deficit is the result of actions, provisions, etc., that predated Obama’s presidency.  Note that CBO’s January 2009 deficit projections were calculated & presented on 1/8/09 – before Obama’s inauguration.

Hence, I remain unimpressed by attempts to blame Obama for the deficits thus far incurred under his watch.

My real concern about Obama’s spending habits is WRT the long term.  CBO’s scenario for economic growth assumes a bottom in 2009, followed a moderately strong recovery (3-4% real GDP growth from 2010-2014).  However, between the massive damage to the financial system, risk aversion by lenders & investors going forward, & the continued deleveraging of private-sector balance sheets, continued weakness in both consumption & investment (and hence in economic growth) is not implausible; see, e.g., Jamie Galbraith, Martin Wolf, & the Levy Institute (657 KB PDF).  So it’s reasonable to consider recovery scenarios far weaker than CBO’s projections.  Under such scenarios, however, the red ink from both the CBO baseline and Obama’s budget proposals become far less affordable.

Figure 3 – Debt/GDP 2008-2019 (%), CBO Baseline deficits:

obama-deficits3Figure 4 – Debt/GDP 2008-2019 (%), Obama deficits:

obama-deficits4Should the debt-GDP ratio rise too high, creditors at home & abroad may lose confidence in the US Treasury’s creditworthiness – which point, we could see a dollar crash, a rollover crisis, dramatically higher interest rates, etc.  IMHO, we would be well-advised to avoid tempting fate.

Notes for Figs. 1-2:

  • “Pre-Obama Deficit” = “Total Deficit as Projected in January 2009” in Table 1-3 of CBO’s report.
  • “TARP” & “Frannie” equal, respectively, “TARP” & “Fannie Mae and Freddie Mac” in Table 1-3.
  • As a proxy for “Stimulus”, I’m basically using “Total Legislative Changes” in Table 1-3, which states that “CBO estimates that enacted legislation will increase the deficit by $195 billion in 2009 and by $1.3 trillion over the 2010–2019 period. Nearly all of that increase is attributable to the economic stimulus legislation”.  In years where “Total Legislative Changes” exceeds the difference between CBO’s 1/09 & 3/09 projected deficits, “Stimulus” = “Total Legislative Changes” – “Total Deficit as Projected in March 2009” – “Total Deficit as Projected in January 2009” + “TARP” + “Fannie Mae and Freddie Mac”.
  • “Other” = the difference between the two in years where “Total Legislative Changes” does not exceed the difference between CBO’s 1/09 & 3/09 projected deficits.
  • “Obama tax cuts” and “Obama spending increase” equal, respectively, “Total Effect on Revenues” & “Total Effect on Outlays” in Table 1-5.
  • For Fig. 2, “CBO Deficits” & “Obama Deficits” equal, respectively, “CBO’s baseline” and “CBO’s estimate of the President’s budget” under “Debt Held by the Public as a % of GDP” in Table 1-1.

Notes for Figs. 3 & 4:

  • Nominal & real GDP data for “CBO growth” in each figure taken from here.  GDP deflators were the quotient of nominal over real GDP.  Nominal debt calculated using the aforementioned nominal GDP data, along with the debt/GDP percentages from Table 1-1.
  • In all growth scenarios, 2008 & 2009 were the same as for “CBO growth”.  Thereafter, real GDP was assumed to grow at 1% or 2% annually.
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3 Responses to “Obama & Deficits”

  1. WRT future projections, this is one matter that I found concerning (though I haven’t really said much about it yet). Optimism is all well and good, but the President himself freely admits that the projections his administration officially backs are optimistic ones, i.e. they incorporate projections for recovery and growth that are higher than those used by the CBO projections. Again, optimism in and of itself is not necessarily a bad thing, but I also worry that it is not prudent to base one’s course of action on overly rosy suppositions, particularly when we have little solid evidence to suggest that such optimistic assessments are even realistic ones.

    Ah well, I suppose we’ll know soon enough; there sure is nothing more fun than running experiments with nothing less than the future well-being of our Republic at stake. Its not as though we need to be careful with that, right?

  2. jpapanikol Says:

    Just to be clear, Matt. I don’t blame Obama for creating the deficit. I blame him for ignoring them and pretending that they don’t matter!

  3. seeker312 – That’s why I specifically used CBO #’s, rather than OMB’s – to filter out the optimism. My concern is that CBO’s projections may also be optimistic.

    jpapanikol – check. It’s not clear to me that Obama’s ignoring the deficit, so much as making a judgment that the risk posed thereby is less than that posed by other factors (e.g., debt-deflation, prolongation of the recession). There’s a reasonable argument to be made in favor of deficit spending in times of crisis, but IMHO Obama’s actions to date aren’t defensible on such grounds. His fiscal stimulus is largely misdirected; his banking plan seems to provide too little bang for the buck (a trillion $ to price toxic assets?); his monetary stimulus focuses too much on (basically) centralized allocation of capital via Fed attempts to directly influence private-sector interest rates.

    Given my druthers, we’d have maximized monetary stimulus (via QE, etc.); relied largely on automatic stabilizers for fiscal stimulus; & (to the maximum extent possible) reserved discretionary deficit spending for fixing the financial system. Insofar as discretionary fiscal stimulus was deemed necessary, I would’ve preferred block grants to states, & infrastructure spending using the same procurement rules as that for the I-35W bridge rebuilding.

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