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  • Obama Misdiagnoses Source of Deficits

    President Barack Obama

    President Obama says he wants to reduce America’s record trillion-dollar deficits. Too bad he hasn’t even correctly diagnosed their cause.

    During his State of the Union Address, the president asserted: “At the beginning of the last decade, America had a budget surplus of over $200 billion. By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription-drug program.”

    In other words, it’s President George W. Bush’s fault.

    This can’t be true. Mr. Bush implemented the three policies mentioned by Mr. Obama in the early 2000s. Yet by 2007 — the last year before the recession — the budget deficit stood at only $161 billion. So how could those policies cause trillion-dollar deficits from 2009 through 2020?

    Let’s unpack Mr. Obama’s claim.

    His methodology measures the combined cost of the three policies against a “budget baseline” — a snapshot of what the budget would look like for the next decade if today’s tax and spending policies are maintained. Think of the budget baseline as the do-nothing default option.

    The first problem is the president’s baseline deficit of “$8 trillion over the next decade.” This likely refers to the 10-year, $8.9 trillion deficit in the White House’s budget baseline last year.

    Yet this baseline contained numerous questionable assumptions. It assumed that spending in Iraq and Afghanistan would continue growing forever, while spending on regular discretionary programs (which has doubled over the past decade) would slow to approximately 2 percent annual growth for most of the decade.

    The baseline also incorporated provisions of Mr. Obama’s own stimulus bill that had already been enacted — deficit spending that he obviously didn’t inherit from his predecessor. Thus, the $8 trillion baseline deficit figure is not credible.

    And that’s not all. By writing a baseline that assumes spending in Iraq and Afghanistan would continue growing forever (which was never U.S. policy), the president overstates the “inherited cost” of these wars over the next decade by $1 trillion. In reality, troop pullouts will drastically reduce the impact of Iraq and Afghanistan on future budget deficits.

    Overall, the president’s data contains too many dubious assumptions to be useful.

    So how much of the deficit is really caused by the tax cuts, war spending and Medicare prescription-drug entitlement?
    One easy method is to begin with a more realistic budget baseline, using data from the more neutral Congressional Budget Office (CBO). Maintaining today’s tax and spending policies (and assuming a gradual troop drawdown in Iraq and Afghanistan) would, using CBO data, bring $13 trillion in deficits over the next decade.

    Compare that to the 10-year cost of the tax cuts ($3 trillion), Medicare prescription-drug entitlement ($1 trillion) and Iraq and Afghanistan spending (approximately $600 billion, again assuming a gradual troop drawdown). This adds up to $4.6 trillion, or just over one-third of the $13 trillion in baseline deficits.

    This contradicts the president’s claim that most of the deficits result from those three policies.

    Even this methodology does not tell the whole story. After all, if Washington collects $3 trillion in taxes and spends $4 trillion, who’s to say which of the spending programs “caused” the resulting $1 trillion deficit? One could pinpoint any $1 trillion group of spending programs and blame them for the budget deficit.

    A better way to diagnose the cause of long-term deficits is to measure taxes and spending against their historical averages. This more comprehensive methodology shows that long-term deficits are overwhelmingly driven by runaway entitlement spending.

    By 2020, the CBO-based budget baseline projects that federal spending will reach 26.0 percent of the economy (5.3 percent of the economy above the 40-year spending average). Revenues will settle at 17.7 percent of the economy (just 0.6 percent of the economy below the revenue average) — and even that assumes all tax cuts are extended.

    So as deficits expand by 5.9 percent of the economy, nearly 90 percent of the growth will come from higher-than-average spending, and just over 10 percent from lower-than-average revenues.

    Virtually all of this new spending will come from surging Social Security, Medicare and Medicaid costs (driven primarily by 77 million retiring baby boomers), as well as net interest on the national debt. These four expenditures will cost $26 trillion over the next decade — surging from $1.6 trillion this year to $3.6 trillion in 2020. That is causing the massive budget deficits over the next decade — and must be the focus of any serious effort to reduce the budget deficit.

    Finally, there is some hypocrisy at work. Mr. Obama criticizes Mr. Bush for “not paying for two wars, two tax cuts, and an expensive prescription-drug program.” Yet he would extend $3.9 trillion of these policies (while repealing $700 billion in tax cuts) without paying for them, either. By his own logic, he’s almost as irresponsible as Mr. Bush.

    Cross-posted from The Washington Times

    Posted in Economics [slideshow_deploy]

    8 Responses to Obama Misdiagnoses Source of Deficits

    1. Don, Bismarck, ND says:

      Am I tired of listening to that crap. Obama's a loser. Plain and simple. He wants things like that to happen. Then he can proclaim himself president for life. Just like Hugo, his idol.

    2. J.C. Hughes, Texas says:

      My response is not to Brian's fine article, but rather about the US Mint's undermining message when introducing their new 2010 Penney. As I mentioned to a friend "I’ll agree the US Mint’s statement '… vertical stripes of the shield represent the states joined … to support the federal government …' is erroneous and counter to the nation’s federalist principles. On the contrary, the federal government’s role is to back states by providing for a common defense …. This is so independent states and free markets can function and prosper in a secure environment which promotes the general welfare."

    3. J.C. Hughes, Texas says:

      Numerical facts don't figure into Obama's rhetorical quest for political self-aggrandizement.

    4. dan williams greensb says:

      "theOMAN" is an IDIOT,a really bad LIAR,a DISTORTIONist maybe all 3, but definitely a Progressive/Lib NARCISSIST which ='s in short a NI'IM ~~~

    5. Wayne Hatch, Mirphy, says:

      I just caught a bit of Mr. Obama's comment on the success of the stimulus plan, but after a bit, I had to turn him off. It appearts to me that every one of his talks on the economy and the successes of his administration in bringing us back from the brink display a great deal of redundancy that is totally contrary to the economic reality at the curb level.

    6. Becca West says:

      Bush conveniently left out of his Annual Budgets while in office the costs of both the Afghanistan and Iraq Wars. In 2006 McCain went on the Senate floor to object to this and stated that at that point 90% of the costs of both Wars had been funded through Emergency Supplementals and had NOT been included in the Bush Administration's annual budgets since the Wars began.

      A huge omission, wouldn't you say?? We're talking over $600 Billion AT THAT POINT (2006) left "off the books."

      That explains the gap between the deficit Bush and his Loyalists proclaim he left the next Administration and what Obama knows he inherited because he put the costs of both Wars in the Budget.

      Just look at the Congressional Budget Office prediction for the budget deficit in 2009, the last budget submitted by the Bush Administration. They projected a $1.2 Trillion Dollar Deficit and it turned out to actually be $1.4 Trillion dollars.

      That's what Obama inherited. And (some) people expect him to have turned around in one year what it took eight years to create?

      Where's the sense in that.

      Where were these Tea Partiers and Fiscal Conservatives from 2001 to 2008 when the Deficit and Debt went up, up, up every year. Why weren't they complaining when hundreds of billions of dollars were left out of the budget each year.

    7. Bobbie Jay says:

      Sure would be nice if people could get over the mistakes of the past and open their eyes to the daily ignorance of the present. Obama was in the senate you complain about, Becca. Research what obama did in his senate seat.Voting present plays a big role on your complaints of Bush. Didn't do much of anything else.

    8. Wayne Hatch, Mirphy, says:

      It's so easy to blamre someone else for whatever ails us. The problem today in this country is the expectation that government should be all things to everybody.

      Shared responsibility versus individual responsibility – something liberals don't understand.

    9. Pingback: Obama's Deficit | mylifeinministry.com

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