CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Does the Post Have to Say "Tame the Debt" In Every Budget Article?

Does the Post Have to Say "Tame the Debt" In Every Budget Article?

Print
Thursday, 20 December 2012 05:32

That's undoubtedly what readers are asking after seeing this strange and inaccurate phrase appear yet again in an article about the latest tax plan Speaker Boehner put forward. Of course it is inaccurate since it implies that debt and deficits have been out of control.

As every budget analyst knows, deficits were actually quite modest until the economy plummeted in 2008 following the collapse of the housing bubble. The deficit in 2007 was just 1.2 percent of GDP. The economy can run deficits of this size forever, since the debt to GDP ratio was actually falling. The deficit was projected to remain low for the next several years until the projected expiration of the Bush tax cuts pushed the budget into surplus in 2012.

deficits-per-GDP-10-2012

Source: Congressional Budget Office.

There have been no large unfunded increases in spending nor permanent tax cuts since these projections were made. The sole reason that the deficits came in much higher than projected was the impact of the recession on tax and spending and the stimulus measures taken to counter the downturn.

The Post has consistently misrepresented the nature of current deficits. This helps to promote its agenda of cutting Social Security and Medicare.

The Post also misrepresented the risks of missing the December 31 deadline of reaching a budget deal. It told readers:

"If no action is taken before the end of the year, taxes will rise for nearly 90 percent of taxpayers in January, potentially sparking a new recession, according to many economists."

In fact it is not clear that any economists say that missing the deadline will cause a recession. The Congressional Budget Office and others have projected that if the higher tax rates and spending cuts remain in place all year that the economy will likely fall into a recession. They did not say that this would be the result of waiting one or two weeks into January to work out a deal.

Most analysts think that President Obama's negotiating position will improve after the tax cuts expire. If this is the case then trying to maintain pressure on President Obama to reach a deal before the end of the year would also advance the Post's agenda for cutting Social Security and Medicare. 

Comments (14)Add Comment
Social Security, Medicare
written by Jennifer, December 20, 2012 8:54
. . . would also advance the Post's agenda for cutting Social Security and Medicare If only it was just the Post's agenda. Unfortunately what is becoming clear that this is the agenda of most of Washington as well as the White House.
bubble data
written by Arne, December 20, 2012 9:22
You have spent years chastising reporters for going back to sources that did not see the bubble, but here you are using a forecast from analysts that did not see the bubble. Part of the "reason that the deficits came in much higher than projected" must include the fact that revenues (actual and projected) were inflated by the bubble.
Projections
written by Mark, December 20, 2012 9:26
Tell me if I'm missing something, but you've used this chart many times and I have to ask... Weren't the projected low deficits a result of the bubble? It seems to me if you're going to blame the high deficits solely on the collapse of the housing bubble, you have to credit the low deficits on the expansion of that bubble.
.
written by jerry, December 20, 2012 9:52
Mark - exactly! The low deficits (surplus in Clinton years) were a big driver for the thirst for more private sector debt that led to the housing bubble. In an economy running a trade deficit of 3-4% of GDP, you're not going to make it very far with government deficits of only 1-2% of GDP.

And, even with deficits at ~8% of GDP we are still seeing tens of millions unemployed.. so in addition to ending this fiscal cliff fiasco, we really should be cutting taxes/increasing spending until we see demand picking up and the unemployment lines emptying out.
...
written by Ben H, December 20, 2012 11:08
I think Dean's analysis is pretty straight forward. The deficit is not the result of changes in government policy, i.e. Obama has not personally gone on a spending spree. This is how the press portray it, that the Democrats have been going wild with the check book. The reason they're so eager to support this portrayal is that they support the elite consensus around dismantling the welfare state.

The problem with this graph, as opposed to the one posted by Krugman via the CEPR, is that conservatives can take one look at it and see all of their beliefs confirmed. They can say, see look, the second Obama got into office deficits exploded. Then we have to go through what appears to be convoluted arguments about how automatic safety net spending kicks in while revenues drop during a recession.
projections
written by David, December 20, 2012 11:14
Haha, jerry, very funny. You will probably not be the first against the wall when the higher taxes come. But, seriously, not all tax cuts stimulate demand: http://blogs.reuters.com/taxbr...e-economy/ This fervor for low taxes is ridiculous. You get what you pay for, and we're paying so little right now it's no wonder we're getting a government that few people have confidence in. You end up with conservative pundits who can't make it out in the free market as businessmen pretending that they know economics and writing columns in major newspapers.

Mark, the bubble did help increase revenue and thus decrease the deficit sure. But there is no bubble forming now and yet the deficit is being aggressively lowered, and it's a sustainable path, unlike the bubble-fueled deficit reduction. Now, if we can just stop the healthcare industry from gouging us for twice as much as we could be paying, we'd make some progress.
...
written by jerry, December 20, 2012 1:04
David, when you have tens of millions of people unemployed and household debt levels at near record highs, then yes, tax cuts absolutely will stimulate demand.
...
written by skeptonomist, December 20, 2012 1:25
Dean is certainly right that deficits should not be a major concern in a recession (which we are still in to some extent); it is also worth mentioning that Republicans are only concerned with deficits when a Democrat is President. But projecting deficits, and government finances in general, from an expansion cycle (2002-2007) is a no-no. In reality economies are cyclic and rational planning would include the realization that the good times don't go on forever. Projecting on the basis of 2002-2007 would assume in particular that the housing bubble was sustainable. At the moment Republicans are trying to bolster their political arguments by doing the opposite, projecting from what is actually a historically weak proto-recovery.
tax cuts
written by mel in oregon, December 20, 2012 2:06
tax cuts won't stimulate demand. the economy did not boom when the wealthy were given tax cuts. a middle class person will not go on a spending spree if given a small tax cut. neither will the poor or working class (which now is a majority of americans by the way). the real fiscal cliff has nothing to do with the deficit. the real fiscal cliff is the probable end of the dollar as the world currency forecast by the trade agreements between russia, china, india, japan, brazil & south africa. when this happens there will be no more foreign purchases of tbills which then leads to hyper-inflation. since our trade imbalance is so huge, we have no leverage at all on the world scene. if american leaders were intelligent, the first item to change would be the fed, replacing bernanke with someone who cared about the american people & not wallstreet financial speculators. obviously american leadership is woefully incompetent so we are going to sink faster than the titanic & american corporations will be asking, "wha hoppen".
Deficit Projections and the Bubble
written by Dean, December 20, 2012 3:02
Folks are absolutely right that the economy in 2007 was sustained by a bubble (same was true in 2000). For that reason the growth path was unsustainable. However, my point is that the large deficits are due to an economic collapse, not out of control spending or tax cuts.

If we had an economy on a sustainable growth path in 2007 (for example with near balanced trade), then the deficits faced in 2008-2013 would be entirely manageable. You can say that it would not be easy to switch the path of economic growth and of course this is true, but the point is that the problem is that we are not on a sound economic growth path. The large deficits are a result of that problem.

It doesn't make sense to focus on something that is not a real problem just because we might be able to fix it easier than our country's real problems.
..
written by jerry, December 20, 2012 5:12
Mel - it's hard to pick much out of that statement that isn't completely incorrect. The US has no leverage on the world scene because of it's trade deficit?? The US is THE global driver of demand, almost every exporting nation relies on us. When we go down, they go down with us. And yes, tax cuts do stimulate demand (more so for lower/middle class than the rich). What do you think poor people do with the EIC, just throw it in their bank accounts for a rainy day??
tax cuts on the wealthy won't raise demand
written by David, December 20, 2012 7:35
Jerry, you're so funny!

Here's the PayPal CEO explaining why he thinks tax cuts don't create jobs: http://www.salon.com/2012/12/1...eate_jobs/. Here's a small business CEO explaining why tax cuts won't help her create jobs: http://www.post-gazette.com/st...or-664828/.

Household debt near an all-time high? Tax cuts on the middle class will go first to paying that off; and consumers are overspending right now anyway (as Dean has pointed out a few times), probably creating jobs mainly in Germany, China, India etc., So don't expect too big a boost in employment from that, either.

No. The "job creators" sit on huge piles of cash and many reward themselves for this inaction with unsustainable profit margins. That leaves only government spending to put that money back into play into the marketplace. And how do you politically achieve government spending without freaking out the deficit hawks? By increasing revenue. So where do we see large piles of cash wasting away? That's right, in the bank accounts of the wealthy who have no incentive to do otherwise. They're the ones insisting on this drive to decrease the deficit with the economy suffering from a mortal wound, Those who see the need should be the first in line to fulfill it. Pony up, fellas.
Sustainability
written by David, December 20, 2012 8:05
Dean, you're right. Even though the deficit is being lowered "sustainably" (poor choice of word on my part up above), the real problem is being ignored. At the bottom of the barrel is the bad apple: the growth of income inequality in this country is killing the economy.

---on another note, here's a link to that paper by Owen Zidar (UCB economist) exhibit evidence that tax cuts on the top 10% are a waste.

I find that the negative relationship between tax changes and real GDP growth over a two year period is almost entirely driven by tax changes for the bottom 90%.

http://papers.ssrn.com/sol3/pa...id=2112482
...
written by jerry, December 21, 2012 3:47
David.. Lowering taxes is functionally equivalent to increasing spending. I'm not sure why you equate all tax cuts with rich CEO's and job creators, it's tunnel vision thinking you're using there. If the cuts go to paying down debt, perfect! What better use is there? People are absolutely buried in debt that is crowding out spending on other items.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives