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2009 Deficit Is A Triumph Of Fiscal Policy

20 Oct 2009
Posted by Stan Collender

My column from today's Roll Call has already generated "a few" comments.  All responses welcome.

2009 Deficit Is a Triumph of Fiscal Policy

Oct. 20, 2009

Despite the headlines and the page-one, right-hand column, above-the-fold stories in the New York Times and Washington Post on Saturday, I’m not at all upset about the 2009 federal budget deficit.

You shouldn’t be either.

If anything, the fiscal 2009 deficit, which the Treasury officially reported Friday at $1.4 trillion, should have been even higher given the magnitude of the economic turndown at the start of the year. When you consider the close-to-desperate U.S. economic situation that existed — interest rate reductions that were having little impact, greatly reduced business spending, frightened and tightfisted consumers, huge home loan problems, and limited new credit because of the troubles in the financial sector — the federal budget had to play the major role in sparking the recovery that now seems to be well under way.

In other words, the 2009 deficit should be recognized for what it really is: a triumph of fiscal policy. It deserves to be applauded rather than condemned.

The 2009 budget deficit also wasn’t upsetting to me because it was anything but a surprise. The White House and Congressional Budget Office didn’t sugarcoat the number or use gimmicks to make it look smaller. Instead they both projected back in February that it would reach 13 figures. In fact, for a variety of reasons, the final 2009 deficit was about $400 billion (22 percent) less than the $1.8 trillion projected earlier in the year.

What I am upset about are those who are upset about the 2009 deficit. They fall into two categories.

The first are the deficit hawks. These are the people who talked about the 2009 budget deficit as if it were a tool of the devil that had to be avoided because it was going to lead to economic hell and damnation. You could almost imagine their words used in a sermon from a fire-and-brimstone preacher or in a song from “The Music Man” — like Broadway extravaganza telling us that there was budget trouble in River City with a capital T which rhymes with D which stands for deficit.

The deficit hawks who made statements like that about the 2009 deficit were wrong. This is painful for me to say. Not only do I think of myself as having deficit-hawk tendencies, I am generally considered to be a hawk by others. But I have to say to my hawk colleagues that they did the movement a huge disservice by not considering the economic context in which the 2009 deficit occurred. Given the limited tools available to policymakers to deal with the recession, the record-high deficit was completely justified; the criticism from the hawks was not.

The second are what can best be called the “hawks-come-lately” — the people and groups who expressed dismay about the 2009 budget results even though federal red ink seldom, if ever, bothered them before.

What makes the hawks-come-lately so upsetting is that most of the 2009 deficit is the result of previous spending and taxing policies most of them supported. At the start of the year, the baseline deficit, that is, the deficit that was estimated would occur in 2009 because of the laws already in effect, was $1.2 trillion. The only major legislative change since then was the stimulus. Lower-than-expected revenues because of the economy increased the deficit further.

The hawks-come-lately deserve special condemnation for two reasons. Not only have they complained that the stimulus isn’t being spent fast enough, they also didn’t support reducing the deficit years ago when the time was right because the U.S. economy was growing. They didn’t, for example, insist that the substantial additional spending for activities in Iraq and Afghanistan be offset with spending cuts or revenue increases. They also didn’t demand that the tax cuts or major increases in domestic federal spending (Medicare prescription drugs, for example) enacted during the George W. Bush administration be offset in any way.

Not only did these things increase the deficit then, the permanent or ongoing spending and revenue changes they voted for was a major reason the 2009 deficit was so high. In addition, the government borrowing that resulted from the previous years’ deficits increased federal interest payments in 2009 by billions beyond what they otherwise would have been.

There are two lessons from this year’s budget debate. The first should be that all federal budget deficits are not created equal. A deficit does not automatically indicate that a fiscal policy is incorrect, corrupt or dangerous. A deficit that occurs like many did earlier this decade when the economy is thriving may indeed be the sin the hawks make it out to be. By contrast, a deficit that occurs when fiscal policy is needed to stimulate the economy may well be a very good deed.

The second lesson is that those who criticize a particular budget deficit can’t automatically be assumed to be fiscally responsible. Federal deficits are as much the result of spending and taxing policies put in place years before as they are of anything enacted in the past few months. In fact, as we now know from how long it took and is taking to implement both the Bush and Obama stimulus plans, the current year’s deficit has very little to do with policies that have been enacted recently.

My biggest fear is that neither of the lessons about the 2009 budget deficit will be learned in any meaningful way. Frankly, if that happens, it will really be upsetting.

Spot on comments. Well

Spot on comments. Well done!


deficit

Excellent easily understood explanation for anyone who wants to understand it. How do you get the millions of ignorant and semi-literate Americans currently being led by the nose by right wing politicians and cable tv demagogues- who have no interest in having people understand it- to read let alone understand this information?


The Music Man

I can imagine the deficit hawk taking a cue from the Music Man because Rep. Dan Lungren did just that.

http://www.youtube.com/watch?v=Aku_dHhpTQk

It was as stupid as you'd imagine.


Thank You

I have never heard of this blog, but got linked to it from Andrew Sullivan. After reading this piece, I'm a fan. It's good to read some sensible policy analysis from the right on the web, as opposed to all the party-line parrottry (I made that word up).

If conservatives showed more intellectual rigor, maybe they could actually attract some voters...

Acknowledging that our problems began before Obama is not unmanly, as so many cons seem to feel. It's being honest and realistic. Our conservative comrades in the UK talk to the voters like adults, why can't our leaders do that here? Maybe because we lack leaders with ideas or backbones.


Thank you for your clarity

Wow!
The deficit increased by 200 billion after the stimulus package of 700 billion. Sounds like a very successful policy package.
Thanks for the explanation.
Kevin


The Deficit

Thank you for clearing that up for people.

Greg Czar
Professor of Economics


Stan Collender's Comment

THANK YOU! Finally a cogent and rationale rebuttal to the spurious sputterings of those who were in charge when the credit card was being charged up to the hilt. I'm VERY risk averse and prudent in my finances and I recognize the morass that President Obama has inherited. REGARDLESS of who is "at fault", however, I'm willing to forgive EVERYONE if only they'd get on board with trying to get us back on track instead of "counting coup" or "making points" off each other. Today's world calls for our "Representative Leadership" to act like responsible adults instead of rabid "fans" of a political mindset or spoiled brats who don't cooperate when they aren't in control as too many of today's Republicans do. But it also calls for a rationale limit on "placating" obstructionists. For Democrats, "acting like adults" means that sometimes you have to take a firm stand and stand up for your position without apology and move forward..not disparaging those who try to stop progress, but not letting them get away with it either. We can "call each other out"...but it ought to be on substance and ought to be for the purpose of creating a better product or process.


The people who have recently

The people who have recently begun to criticize the deficit are the tea party protesters. Most of them have no idea about the economic principles that surround our national deficit, also not understanding "good" or "bad" debt. Most of these people think that printing money ALWAYS increases inflation (look to the 30's if you think i'm lying, the monetary base was almost doubled with little to no inflation), or that "ending the fed" will actually solve our nations debt problems. It's simple people being exploited by smarter people using small words they can understand. The way we figure our debt as a nation is not the same way you balance your checkbook, neocons.


My problem with the budget

My problem with the budget deficit is this...... it went straight to the banksters pockets for bonuses.


Why do we pay interest on borrowed money?

"...previous years’ deficits increased federal interest payments in 2009 by billions beyond what they otherwise would have been."

So why exactly do we pay interest on borrowed money? In recent years, servicing the national debt has cost about $500 billion per year, about the same as the deficits we were incurring (before this year). Without the debt service, deficits would have been near zero.

Why not have the government create the large sums of money needed to stimulate the economy this year and spend it into being without borrowing it? Why cover deficits, when they are necessary, as they are this year, with borrowed money, rather than with government-created money?

Inflationary? Yes, but no more so than borrowing. And anyway, inflation is needed this year to offset deflation. So why not use government-issued money, rather than borrowed money, and avoid a ton of future interest obligations?


A Third Category

Sure, there is a decent rationale for increasing the deficit in a time of crisis, and certainly it wasn't "invented here." But I've got to put myself in a third category of people who are shocked and awed by the deficit -- borrowing money comes at a price. At some point, our indebtedness must raise the cost of capital, forcing interest rates to rise despite the Fed's artificially low interest levels. As rates rise, companies will pay more for their loans and the economic benefit of deficit spending will have been temporary.

Sorry folks, but enjoy Dow 10,000 while you can.


2009 Deficit Article by Stan Collender

Excellent article. Given the massive GDP, huge domestic markets, diverse natural resources and other intrinsic strengths that the United States is blessed with --- we can handle a large amount of debt. On a micro level compare the conservatively valued assets of a financially astute and skilled U.S. worker against his/her mortgage debt. Using this perspective it's clear that our country's debt level is just not anywhere near the danger zone. The birthers, the Republicans scrounging for political advantage, and all the conservative pundits on the make --- the whole anti-Obama crowd are having a field day thrashing about with half-baked debt analyses and flinging out scare words. The average reader is being deliberately confused. Moreover the more zeros in any accounting document makes almost every normal person’s eyes glaze over. You need some professional training to have any coherent feel for such large budgets. In the final analysis you have to look to input from credible economists --- such as Nobel Laureates in economics like Paul Krugman and Joseph Stiglitz --- for their critiques on the current debt. People like Glenn Beck are full of sound and fury but just not credible. Their commentaries get ratings and sell ad space but their content is pure foolishness.


Anyone with a reasonable

Anyone with a reasonable understanding of economics knew that massive government spending was the only way this country was not going to end up in Depression 2.0. Right-wingers and other deficit chicken-hawks knew that it was a low-risk political strategy to slam the government spending as "liberal" instead of simple Keynesian economics. Those guys were (and are) simply playing for position. The problem with the right-wing is that it is completely brain-dead. Other than criticisms, what solutions are they offering? Most are the same half-baked supply-side crap that led us to this point.


Nothing to worry about?

I am a deficit hawk and have been since the mid-1970's. I left the GOP in the mid-90's when I finally realized they weren't serious about spending control.
Having said that- I would love to be relieved and not worry about such a deficit.
What would allay my worries is some discussion of how and when we can ever pay this back, and start reducing the 10 trillion or so we already owe.
I notice from my readings that the WWII deficits were larger in comparison to the GDP; but they took all of the 1940's and 1950's to pay down, and even then, we never finished the job- the debt started to rise again in the 60's.
I enjoyed Bruce's discussion on why supply side mani should be ended; I always am wary of any scheme that tells us not to worry about the connection between spending and revenue.
Granting Washington permission to incur endless deficits, while perhaps acceptable from a economic standpoint, is terrible politics- it encourages the worst impulses of both parties.


Some spending will be permanent

The expansion of the money supply by the Fed us even more worrying than the Federal deficit.

That said, I'd bet that at least $300 billion of the $700 billion stimulus becomes a permanent yearly expense. It is very easy to turn on spending - very difficult to turn it off.




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