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Home Publications Blogs Beat the Press President Obama Doesn't Understand the Origins of the Deficit

President Obama Doesn't Understand the Origins of the Deficit

Tuesday, 26 July 2011 04:00

This fact should have been highlighted in the news reporting on President Obama's speech last night. President Obama asserted:

"For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug
program were simply added to our nation’s credit card.

As a result, the deficit was on track to top $1 trillion the year I took office."

This is seriously mistaken.

The Congressional Budget Office's projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."

This is what is known as a "gaffe" of enormous proportions. It indicates that President Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble. This misunderstanding of the origins of the budget deficit could explain President Obama's willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid.

It is incredible that no major news outlet noted this enormous gaffe on the fundamentals of the most important issue facing the country today.

Comments (20)Add Comment
written by Jay, July 26, 2011 7:29
It's clear that a lot of people don't understand the difference between deficits and debt. Republicans do the same thing and never get called out even though they are the most savvy about all things regarding money or management of affairs. Sense the sarcasm there. This is unacceptable when you can look on the Internet and get this information from reputable sources.

It's disconcerting that Obama doesn't know this difference as well. Especially considering he has a team of people that brief him on everything under the sun. Even if he doesn't know economics someone by now should have schooled him on the basics. It's clear that some of his staff is either incompetent or lacks of the fortitude to tell the President the truth. There's always the third option that the President just doesn't listen as well but I have a feeling this might not be the case.
written by joe, July 26, 2011 8:12
He didn't want to point the finger at his donors on Wall Street. It took all the nerve he had to steal Buffet's line about hedge fund managers paying lower a tax rate than their secretaries.
Conventional Wisdom
written by bakho, July 26, 2011 8:36
Obama is merely repeating the Conventional Wisdom. Interesting how he phrases, "money spent on tax cuts" when that is reduction in revenue.

Did Obama ever take macro? if he did, maybe he slept through it.
Not Understanding the Origin of the Budget Deficit
written by sherparick, July 26, 2011 8:39
I would say the President's misunderstanding is shared by elite opinioin in the political and media world. They have never understood the origin of the current deficits if that opinion is reflected in the news stories that run in the NY Times, WaPo, Cable news, and broadcast news stories are any indication. Secretary Geithner and the President have been in denial about the effects of the collapse in house prices for four years. As true adherents of Robert Rubin's neo-liberalism, they can't get their heads around the fact that asset bubble days are over for at least a generation. See Michael Lind blog at: http://www.salon.com/news/poli..._sum_world

I disagree with Lind to the extent he does not discuss the dollar and the necessary decline of the dollar in trade weighted terms against China's, Japan's, India's, the Euro, and Brazil, would fix many of America's competitiveness problems.
Housing bubble caused low deficits too
written by Bosco, July 26, 2011 9:08
Ok, so the collapse of the housing bubble caused an economic recession that drove up the deficit. But doesn't that also mean that the deficits before the collapse were artificially low because of the housing bubble? The economic activity and capital gains generated because of the housing bubble pumped up tax revenue, masking the deficits that resulted from the Bush tax cuts, the wars, the Medicare prescription drug benefit, etc. You have argued repeatedly that the housing bubble was unsustainable, so it is a little silly to suggest that the pre-collapse status quo is some sort of baseline we should be measuring anything against.
Obama took office in Jan. 2009, not in Jan. 2008
written by A Greek bearing facts, July 26, 2011 9:17
The claim that the nation was *NOT* on track to have a $1 trillion deficit when the President took office is a most peculiar one. Readers of this blog are supposed to accept the CBO estimate of a future deficit in Jan. 2008 to guauge the likely deficit at the time the President actually took office? Let me remind fellow readers that neither the CBO (nor, in all probability, Dean Baker himself) anticipated the severity of the financial crisis and 2008-2009 recession back in Jan. 2008. When the President took office in Jan. 2009 the nation was certainly on track to have a $1 trillion deficit. The severity of the financial crisis and recession combined with the fiscal choices made in 2001-2008 -- choices accurately described by the President -- meant the nation was indeed on a course to have immense deficits in 2009-2010. This would have been true even if the President and new Congress had not attempted to revive the economy with an $800 billion stimulus package. Readers can point to a gaffe, but I'm pretty sure that in this case it's not the President's.
written by skeptonomist, July 26, 2011 9:26
Yes, the economy was "on track" for huge deficits. If you look at the "track" of debt/GDP since 1981 it is obvious that revenues have generally not been adequate to meet expenditures. Economists who live in the real world should know that the economy has ups and down - if there are small deficits when the economy is doing well there will be huge deficits when it is doing poorly. Are economists supposed to be like Alan Greenspan and rule out the possibility of recessions in their projections?

In the real world, the US has an inefficient health-care system and this must be paid for partly out of tax revenues. Paying for expenditures comes first - reform comes later, if tax burdens are too high.
written by foosion, July 26, 2011 9:34
Causes of the deficit
All the Discussion of the Deficit/Debt is Complete Nonsense
written by Paul, July 26, 2011 10:25
Whatever the track of the deficit was when Obama took office has NO relevance to our economic problems now.

We are suffering from a massive insufficiency of demand which is suppressing job growth. Cutting the deficit will only exacerbate these problems. Even talking about reducing government spending has reduced demand expectations of the "jobs creators" who rightly see reduced demand ahead.
President Obama Doesn't Understand the Origins of the Deficit
written by jimo, July 26, 2011 11:12
Jan 8th 2009 projected a deficit over 1 trillion. This was before Obama took office!
Maybe I should have included Obama's next line
written by Dean, July 26, 2011 11:16
"to make matters worse, the recession meant that there was less money coming in, and it required us to spend even more – on tax cuts for middle-class families; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit."

Okay, is it clear now. President Obama was claiming that we were looking at a deficit of more than $1 trillion before the collapse of the housing bubble and the resulting recession. That is not true.

He gets his projections from the place I cites, the Congressional Budget Office. And, their number was $198 billion, not more than $1 trillion. So, he was making inaccurate claims about the origins of large deficits.

This is important in the debate because the simple fact is that the deficits would not be large if not for the downturn. That is what any honest analysis of the situation shows. This means that we don't have to difficult pontificating about shared sacrifice. We just have to fix the damn economy.

In the longer term we do have to fix our health care system; not Medicare and Medicaid, the health care system. It would be helpful if President would start from the facts about the deficit. (For the record, I opposed both wars, didn't support the tax cuts and would have run the drug benefit through Medicare with negotiated prices.)
Multiple causation is more accurate.
written by AndrewDover, July 26, 2011 12:13
"the deficit was on track to top $1 trillion the year I took office." was true.

"CBO currently projects that the deficit this year will total $1.2 trillion, or 8.3 percent of GDP." CBO, January 8, 2009.
http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-Outlook_Testimony.pdf Page 11.


"As a result, the deficit was on track to top $1 trillion the year I took office."
is more dubious, as Dean points out.

but to say that
"The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble."

is also dubious.

For example. the estimated interest payments of $195 billion in 2009 all came from the past decisions detailed in

as foosion wrote.

p.s. One large factor that changed from 2008 to 2009 was:
"CBO estimates that the value of the GSEs’ mortgage loans and guaranteed assets falls short of their liabilities by about $200 billion (on a present-value basis); that amount is included in CBO’s estimate of the deficit calculated for 2009."
written by justvisiting, July 26, 2011 1:38
NB to those who are citing a later CBO report. Dean originally said, quote: "The Congressional Budget Office's projections from January of 2008, the last ones made **before** it recognized the housing bubble and the implications of its collapse..." Meanwhile, the January 8, 2009 CBO report the rest of you keep citing notes on the very first page, quote: "The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II," and proceeds to refer to "housing" 60 more times. Nice detective work, but it is not a gotcha cite. If Obama has been referring to THAT CBO report, he would have been remiss not to mention the housing collapse.

However, Obama doesn't mention the exploding housing bubble in his list of causes of the deficit crisis. He lists tax cuts, two wars, prescription drug program ("As a result, the deficit"). Housing collapse = nonexistent. And Obama does keep pressing the point that "spending" got us to where we are today. And yes, Obama does make a clear distinction in time, as Dean points out.
At other times, President Obama includes the recession.
written by AndrewDover, July 26, 2011 2:37
NB to those who think this is the only time President Obama has described the causes of recent deficits:

"When I took the oath of office 2 years ago, my Administration was left an annual deficit of $1.3 trillion, or 9.2 percent of GDP, and a projected 10-year deficit of more than $8 trillion. These deficits were the result of a previous 8 years of not paying for programs—notably, two large tax cuts and a new Medicare prescription drug
benefit—as well as the financial crisis and recession that exacerbated our fiscal situation as revenue decreased and automatic Government outlays increased to counter the recession and cushion its impact."

Barack Obama
The White House,
February 14, 2011.
written by justvisiting, July 26, 2011 3:02
Nice try, AndrewDover, but you're actually making Obama look worse (if consistently bad). Using *your* previous cite—the January 8, 2009 CBO report—quote: "CBO projects that the deficit **this year** will total $1.2 trillion, or 8.3 percent of GDP." But I guess it depends on the definition of "When I took the oath of office."
written by skeptonomist, July 26, 2011 3:43
Politicians are trying to saddle each other with blame; let's set that aside and think about what could and should be done about deficits. Congress has the responsibility to raise revenues to approximately match expenditures so that over the long run the debt does not get out of hand. If Congress sets up an inefficient Medicare/Medicaid system or authorizes wars, it must find the revenues to pay for them. Saying "well, if we had set up a more efficient health-care system, we wouldn't have deficits" is not an excuse. Politicians have not been meeting this responsibility since around 1981. Even during the Clinton administration deficits were projected to be excessive; as Dean himself has said the surpluses ($2B and $86B - larger numbers assume that the SS Trust Fund will be confiscated) were a temporary windfall due to the stock-market bubble.

Supposing it is necessary to reduce deficits over the next few years, what could be done? Even if Democrats regain large majorities in 2012 they are not likely to revisit health care, since the most important provisions of the new law do not take effect until 2014. It is plausible that if the economy has improved a Democratic Congress could raise tax rates on upper brackets.

Of course whether we should even be thinking about deficits now is another question. If I were Czar I would immediately raise upper-bracket and corporate taxes, since that money is not being used constructively, and spend all that money on infrastructure and developing alternate energy sources, but of course sensible things like that can't be done in our system.
written by Eric, July 27, 2011 4:30
Had the last decade not featured an enormous and obvious housing bubble, bubble-driven stimulus of demand, misallocation of capital, land, and labor-power, and unsustainable stream of revenue to the State, Obama never would have been elected, which is why it cannot be mentioned. Housing began unraveling in 2006 and was in steep decline throughout the election cycle, along with the economy and financial architecture. Stop pretending that "fixing the economy" is going to happen or is a platform for him to run on - the ship sailed with the last election. Obama to the extent he remains useful by unapologetically underwriting the losses of finance capital and its capitalists, underwriting war, underwriting the speculative bubble in health care and health insurance, and managing the declining fortunes of the working classes, will likely retain power. The other side really doesn't have a clearly better manager, to say nothing of the barely visible Left.
usual rhetoric
written by Frank, July 29, 2011 5:35
Obama is using the "political license" issued to every politician. To accuse him of not understanding a fundamental economic principle based on this one paragraph seems naieve or willfully obtuse.
i still blame Dubya
written by ezAl, August 01, 2011 12:19
yeah, but Dubya's administration laid much of the groundwork for the deficit problems.
written by Dr. Ernest Hamsag, August 02, 2011 5:24
I would say,the deficit was on track because the housing buble even if it was not budgeted...

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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.