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Home Publications Blogs Beat the Press The Deficit Was Not Ballooning Until the Economy Collapsed

The Deficit Was Not Ballooning Until the Economy Collapsed

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Wednesday, 26 December 2012 10:29

A Washington Post article on how most Democrats have come to support the Bush tax cuts for the bottom 98 percent of the population, after originally opposing them, told readers:

"The Democrats were also correct in warning about the effect on the government’s debt. The tax cuts did more to fuel ballooning federal deficits over the past decade than any other Bush administration action — including the wars in Afghanistan and Iraq and the creation of a prescription drug benefit for seniors, according to the Pew Fiscal Analysis Initiative. And in coming years, the Bush-era tax cuts are projected to expand the deficit by trillions more."

Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billions in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.

While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt. 

Comments (6)Add Comment
...
written by skeptonomist, December 26, 2012 12:03
Is Dean really an anti-Keynesian? If not, why does he say things like "the Bush tax cuts...were affordable in the context of an economy that was near full employment". When the economy is booming, Keynesian theory says that taxes should be increased, in order to a) moderate the cycle; and b) keep the debt under control, since deficits are predictable in recessions.

Sorry, there is no evidence that the Fed chairman can eliminate or control cycles by blowing a magic whistle when expansion threatens to get out of control, or by making magical proclamations about future inflation in a recession. Fiscal policy might have some effect and that means keeping taxes high (and deficits low) when the economy is doing well.
Skep, did you bother . . .
written by Tom Geraghty, December 26, 2012 2:27
. . . to actually read the post? The part that says "The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire"?

Do you have problems with the CBO analysis? If so, what are they?
...
written by joe, December 26, 2012 9:19
The national debt increased almost 500 billion in the year before the Dec 2007 recession started. In contrast, the national debt increased 1 billion in the year before the March 2001 recession. Comparing the growth in the national debt at the peak of the business cycle paints a more accurate picture because the budget deficit treats money borrowed from the govt trusts as revenue.

National Debt
12/01/2006 8,635,596,937,286.06
11/30/2007 9,149,341,364,936.71

03/01/2000 5,725,649,856,797.45
03/01/2001 5,726,774,439,028.95
...
written by bobs, December 27, 2012 4:18
Not sure one can treat the housing bubble as an independent variable and say all other variables looked ok until the bubble burst. Reminds me of the guy who jumps from the roof of a tall building and as he passes the second floor thinks "so far so good."
How many times must it be mentioned...
written by Mark, December 27, 2012 1:02
...that it was the housing bubble itself that was primarily responsible for the projected low deficits prior to its collapse? The bubble inflated revenues, and the collapse deflated them. You can't ignore the former and blame the latter as if it were a random event like a meteor strike!

Without the bubble to prop up revenues, would the Bush tax cuts have still been "affordable"? That's the question. I'm not an economist, but I suspect the answer is no.
The Economy Could have gotten to full employment without the housing bubble
written by Dean, December 27, 2012 2:49
For example, if we didn't have the Clinton-Rubin high dollar policy, then we would have had a smaller trade deficit, which would have moved us toward full employment.

If we had Clinton-Rubin high dollar policy with no housing bubble then we would have needed a large deficit to sustain growth. But give the choice of higher unemployment or a larger deficit, that takes me about one eighth of a second -- give me the large deficit. People who prefer high unemployment should put their jobs where their mouth is. Let someone else have the job.

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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.

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