Tuesday, July 26, 2011

2 Cents on the Trillion Dollar Debt Crisis

As the debt and deficit debate proceeds towards Armageddon (or not), it seems to me that most people, even the politically aware, have checked out. That’s what I’ve been doing more or less, and why not? Even before one starts to fathom a solution, one has to decide whether it’s really a problem, or how much of a problem. Last night, president Obama said: “We would risk sparking a deep economic crisis — this one caused almost entirely by Washington. Defaulting on our obligations is a reckless and irresponsible outcome to this debate.”

But Speaker Boehner responded by saying that a stopgap measure he has proposed is Obama’s creation He urged the president to sign a Republican plan to raise the debt limit. “If the president signs it,” he said, “the ‘crisis’ atmosphere he has created will simply disappear. The debt limit will be raised.” Everyone says everyone else’s deal is a non-starter, full of gimmicks, and in bad faith. MSNBC viewers watch and believe something very different from Fox viewers—and it’s all based on who one believes.

Then there is the legal issue of whether Obama can simply declare the debt limit raised without any legislation at all. This argument, not uncontoversial, was offered by law professors Eric Posner and Adrian Vermeule. They contend:
Our argument is not based on some obscure provision of the 14th amendment, but on the necessities of state, and on the president’s role as the ultimate guardian of the constitutional order, charged with taking care that the laws be faithfully executed. When Abraham Lincoln suspended habeas corpus during the Civil War, he said that it was necessary to violate one law, lest all the laws but one fall into ruin. So too here: the president may need to violate the debt ceiling to prevent a catastrophe — whether a default on the debt or an enormous reduction in federal spending, which would throw the country back into recession.

But whether or not there is a default—or whether it can be legislated or decreed away-- the underlying debate is real, so I decided to take a look at some of the numbers, which are available in a panoply of historical tables supplied by the Office of Management and Budget

Here are some of the numbers I found interesting:

On taxes (or revenues): Since 2000, tax receipts as a percentage of GDP have been declining. In 2000, the government revenue as a percentage of GDP has declined from 20.6% to 14.9% in 2010. It’s tempting to blame this all on the Bush tax cuts, but that can’t be right since the decline, while starting under President Bush has ebbed and waned. By 2004, taxes as a percentage of GDP fell to 16.1%. But then they started to rise, cresting at 18.5% in 2007. This level—between 18% and 19%— is pretty standard since 1960.

But then something happened, and I am not sure why. In 2009, taxes were just 14.9% of GDP. The same was true in 2010. In 2011, the OMB estimate is 14.4%. Perhaps this is due to the “stimulus” tax cuts. But whatever the reason for the drop in revenues, historically low taxes passed under Obama and not just under Bush, are part of the deficit issue.

But spending is part of it, too. In 2000, federal government spending as a percentage of GDP was 18.2%. That figure is as low as it had been since 1966. After that, spending starter to rise. The rise to 2008— spending was 20.8% of GDP— was gradual. But in 2009, spending ballooned to 25.0% of GDP. More, OMB expects it to stay above 22% through 2016. This is higher than it ever was under Bush or Clinton.
To find spending exceeding 22.5% of GDP, one has to travel back to —surprise— President Reagan, when spending was 22.8% of GDP in 1985 (and the deficit was quite high, though only half as high in percentage terms as it is now, even as the ‘80s recession was just as bad as the current one). Also, there does not seem to be a single fiscal year since 1952 (the Korean War) when spending increased by even __ of GDP, let alone 4.3%, as it did between 2008 and 2009. In the post-war era, jumps of 1% are big.

Thus it does seem fair to say that spending in “out of control.” But taxes are out of control too, but not in the sense that they have climbed too high, but that the government has let them fall too low. All of these numbers allow a case that Obama has been somewhat incompetent as president, that he is not the only mature one, a case that David Brooks makes well today.

But to get the debt problem fixed—though it’s still an open debate as to how much of a fix is needed— there has to be a way for both sides to agree to cuts in spending and increases in taxes. If this sounds obvious, well, I guess it is.