There's Nothing Like Data

Tom DeLay says spending is causing the deficit. Is he right? What's really causing the deficit? War? Recession? Spending? Tax Cuts? Some of each? If the latter, how much of each?

To take a quick look at some of these issues, I grabbed data on Federal Revenue, Spending, and GDP from 1992-2004E. First, the Revenue and Spending Numbers. Note that the Bush budgets and tax plans were in effect from roughly 2002 onward (Spending in 2001 was authored by Clinton; Bush's 2001 rebate did cut into what 2001 revenue was under Clinton's budget).

First, in raw numbers (inflation has been modest, so while these are not inflation-adjusted, doing so would only have a minor effect). Under Bush, Federal Spending has skyrocketed. It was $1.86 trillion under Clinton's last budget but 2.01 trillion under Bush's first budget. Under Bush's third budget (authored with a Republican House, Republican Senate, and Republican White House), spending will be $2.27 trillion. That's a 22% increase over Clinton's last year, at most 3-5% of which is due to inflation. Now that's big government. How to pay for all of this?

Certainly not with tax revenue. That's down from $2 trillion in 2001 to $1.8 trillion in 2004. But that must be the fault of the recession, right? Wrong. Here are the GDP numbers:

2000: $9.7 trillion; 2001: $10 trillion; 2002: $10.34 trillion; 2003: $10.76 trillion; 2004E: $11.3 trillion.

So while slow and accompanied by rising unemployment, growth is still positive, meaning the tax base of national income increased. The only mechanism by which terrorism could affect revenue, as opposed to spending, is by reducing GDP, and that just hasn't happened. The only explanation is the Bush Tax Cuts. If we're not paying for the Bush spending now, when do we pay? Later, starting right around when the Baby Boomers retire.

But maybe our ability to pay is also increasing, so that as a percent of GDP, the increased spending and deficit are not so bad? Wrong. Bush increased spending as a percent of GDP from about 18.5% to over 20% (and inflation affects both the numerator and denominator equally and so is not a factor). But he did get the tax burden way down, from over 20% to 16%. But there are no free lunches. If spending is over 20% of GDP and revenue is 16% of GDP, that gap has to be paid at some point. But the bill will come after the 2004 election, and Bush is hoping you are too stupid to realize that (click to enlarge).

Back to the original issue of what caused the deficit, it's not the recession because the tax base has not fallen. The Wars on Terror and Iraq amount to at most $100b per year, so that without them, spending in 2003 might have been 19.63% of GDP instead of 20.56%--still well above the 18.6% mark in Clinton's last budget. So at most 20% of the deficit can be tied to terrorism (and that's just the sort of unforseen need Democrats were referring to when arguing, in vain, against Bush's tax cut). And that's perhaps generous, since it increasingly appears that the War on Iraq was discretionary spending by the Bush administration, rather than anti-terrorism spending. Of the 80% of the deficit not related to terrorism, roughly 1/3 of the blame goes to increased spending and 2/3 to the Bush tax cuts, resulting in this approximate allocation of responsibility (click to enlarge):

AB

Data Sources:

• Numbers for 2001 and earlier are from the 2003 Economic Report of the President , Table B-78: "Federal receipts, outlays, surplus or deficit, and debt, selected fiscal years, 1939-2004" (http://w3.access.gpo.gov/usbudget/fy2004/sheets/b78.xls).
• Numbers for 2002-2004 are from the OMB,
  http://www.whitehouse.gov/omb/budget/fy2004/pdf/04MSR.pdf (See Table 7 for Revenue and Spending data, 2002-2004).

Tax Cuts in Action

This just in:

The White House is expected Tuesday to forecast record budget deficits in excess of $400 billion this fiscal year and next with little hope of a turnaround anytime soon.

The simultaneous operations in Afghanistan and Iraq are running around $60b per year, so we can forgive the administration that. On the other hand, income and GDP are actually rising, so it's hard to blame the economy for the deficit. Sure, unemployment is up, but that's a burden that falls disproportionately on the poor, who as Republicans love to remind us, pay little or no income taxes. (Of course they pay payroll taxes, which the Administration has busted out of the lockbox and comingled with general revenue).

What does this mean for you? Higher taxes and reduced services in the future, higher interest rates, and increases in the Federal Government's cost of debt service.

But surely, as a percentage of GDP, this is not so bad? So says incoming OMB Director Josh Bolten"

"Furthermore, the current deficit -- as a percentage of GDP -- is not large by historical standards and manageable within the overall context of our economy."

The CBO projects next year's GDP at $11.7 trillion, meaning that a $450 billion dollar deficit would represent 3.85% of GDP. Bolten is right that 3.8% is not high by historical standards, as long as you use the right history: the Reagan and Bush I years. On the other hand, Clinton inherited a deficit at 4% and got it down to 3% within a year. So perhaps Bolten should say that the deficit is not large by Republican historical standards. Just to make things clear, I've bracketed the years under budgets written by Clinton (1994-2001) in blue:

AB

UPDATE: The projected deficits for 2003 and beyond in the graph are, of course, way too low now--they should look roughly like the Bush I deficits.

UPDATE: It doesn't happen often, and I had to be awake at 4:30 in the morning to do it, but I beat Atrios on this subject by almost two hours. But he's got a better graph.