‘Twas January 2001. Apple had unveiled some platform to play digital music they called iTunes, the movie Save The Last Dance was poppin’ and lockin’ its way to the top of the box office, this new-fangled idea called Wikipedia opened their doors (or webpages, as it were), and the U.S. government had its third straight year of surpluses, on its way to a fourth.
Additionally, the Congressional Budget Office (CBO) issued their annual budget report in January 2001, estimating that the United States would run surpluses each year from 2002 to 2011. Those projected surpluses would collectively total $5.6 trillion over that same period, enough to pay off the entire federal debt.
It didn’t quite turn out that way.
Eleven years later, in January 2012, the CBO issued another budget report, tallying up a collective $6.1 trillion deficit in the previous ten years, as opposed to the $5.6 trillion surplus that was projected in 2001. This illustrates why the deficit has become an important issue in the 2012 election.
Obama’s solution includes raising taxes on those making more than $250,000 along with cuts in discretionary spending (ie – spending not including Social Security, Medicare, or Medicaid), while Romney proposes cutting government spending and reforming entitlement programs like Medicaid, Medicare, and Social Security.
The good news – they’re both right. The bad news – they’re both wrong. More on that later. As they say, you can’t know where you’re going until you know where you’ve been.
To do that, let’s go back to that CBO report from January 2001, and why its ten-year forecast was nearly $12 trillion ($12 trillion) off the mark. The forecast didn’t anticipate the economy would do as poorly as it did, both after the dot-com bubble and the financial crisis in the latter part of the decade. Because the Great Recession wasn’t taken into account, the government response to it – specifically the tax cuts and stimulus package – was unaccounted for, as well. Add in a couple of unpaid wars in Afghanistan and Iraq, throw in a dash of expansion of Medicare for prescription drug coverage, sprinkle in interest payments to those who loaned government money and BAM! You got $12 trillion worth of difference.
Notice that a combination of two factors – a decrease in tax revenue (either by tax rate cuts or lower gross income to tax) and an increase in government spending (two wars, expansion of entitlement programs, interest payments) – caused the deficit to grow to its current level.
It is unrealistic to think that increased taxes or decreased spending by themselves will balance the budget. If either candidate is serious about reducing federal debt to a manageable level, they must take the politically-unpopular step of implementing a plan that does both.
The only way either candidate would put forth such a plan is if younger voters, who are more likely to see the consequences of a government that continues to run up its tab, demand it.
*Many of the statistics in this post come from David Wessel’s recent book on the federal budget, Red Ink. It provides a digestible and interesting account of the federal budget. “Digestible” might not seem like a compliment, but in regards to a book on the federal budget, it’s high praise.