Thursday, June 11, 2009

Examining US budget deficits

NYT has this nice graphic and report (analysis methodology here) of the US Congressional Budget Office (CBO) projections of the budget surplus or deficit for the years 2009-12. The deficits are set to touch $1.2 trillion annually for the 2009-12 period, a far cry from the projections of $800 bn annual surplus for the same period when Bill Clinton left office in 2001, owes in large part to the largesse and irresponsibility of the Bush administration. The CBO projects a deficit of at least 4% for most of the next decade.

The business cycle accounts for 37% of the $2 trillion swing in budget balance, by way of reduced tax income and increased spending on safety-net programs during the 2001 and present recessions. About 33% of the swing stems from Bush era legislations like tax cuts and the Medicare prescription drug benefit. The Obama administration's extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000, together with the Wall Street bailout, account for 20% of the swing. About 7% comes from the $787 bn fiscal stimulus bill that Mr. Obama signed in February and only 3% comes from Mr. Obama’s agenda on health care, education, energy and other areas. Most of the Obama agenda doesn't cost the government any money and others would be partly offset by proposed tax increases on the affluent and spending cuts. Matt Yglesias sums up this in a nice graphic.

David Leonhardt feels that focussing excessively on health care reform, while critical to reducing the deficits, may not be enough given the difficulty in taking away money from doctors, drug makers and insurers and also the time it would take for such reforms to take effect, during which time the debts would balloon out of control.

In a widely cited study, Alan Auerbach of University of California, Berkeley, has written, "Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it... And, not fixing it is, in a sense, making it worse... Things will get worse gradually, unless they get worse quickly". He has also estimated the deficit to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years.

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