Deficit hysteria is sweeping the nation--and confusing the nation.
Wall Street Journal writer Gerald Shieb went as far as to call it a "
national-security threat." Reports like this on the size and content of the U.S. budget deficit in 2011 tend to exacerbate this hysteria without providing any historical or comparative framework. The three graphs below attempt to place the projected $1.4 trillion deficit for 2011 in the appropriate context.
Figure 1 shows the U.S. budget deficit as a share of GDP going back to 1923. It becomes clear, especially relative to WWII, that the size of the budget deficit, although large, is not abnormally large. While it is the largest peacetime deficit, this can be entirely explained by the fact that the U.S. is experiencing the longest and most severe contraction short of the Great Depression.
Figure 1. Budget Deficit as a Percentage of GDP (nominal), 1923-2009
Many Republicans and Blue Dog Democrats accuse the Obama administration of lacking fiscal restraint. This criticism is misguided, as is shown in Figure 2. Almost half of the projected deficit in 2011 is a lingering result of the unfunded initiatives of George W. Bush--the 2001 and 2003 tax cuts, the wars in Iraq and Afghanistan, and Medicare Part D. The second largest source of the deficit is the result of declining tax revenue directly attributable to the current recession. The next largest contributor to the budget shortfall is the 2009 ARRA, or the stimulus bill. The final contribution comes from the bailouts of Fannie Mae and Freddie Mac, in addition to the TARP. In other words, aside from Bush's unfunded programs and the recession, there is little cause for alarm in the 2011 budget projections.
Figure 2. Contributions to the 2011 Budget Deficit (nominal)
Finally, when compared to the seven largest economies in the OECD, the U.S. budget deficit is in line with the other major nations experiencing the pains of a long and deep recession. This is shown in Figure 3.
Figure 3. OECD Nations' Projected Budget Deficits as a Percentage of GDP (nominal), 2010-2011
When placed in a proper historical, political, and international context, the current size of the U.S. budget is not cause for hysteria. However, the long-term budget picture is indeed grim, but this is mainly due to rising health care costs. That is, the best deficit reduction plan is not the spending freeze or a balanced budget amendment, but rather serious health care and health insurance reform.
Many Republicans and Blue Dog Democrats accuse the Obama administration of lacking fiscal restraint. This criticism is misguided, as is shown in Figure 2. Almost half of the projected deficit in 2011 is a lingering result of the unfunded initiatives of George W. Bush--the 2001 and 2003 tax cuts, the wars in Iraq and Afghanistan, and Medicare Part D. The second largest source of the deficit is the result of declining tax revenue directly attributable to the current recession. The next largest contributor to the budget shortfall is the 2009 ARRA, or the stimulus bill. The final contribution comes from the bailouts of Fannie Mae and Freddie Mac, in addition to the TARP. In other words, aside from Bush's unfunded programs and the recession, there is little cause for alarm in the 2011 budget projections.
Figure 2. Contributions to the 2011 Budget Deficit (nominal)
Finally, when compared to the seven largest economies in the OECD, the U.S. budget deficit is in line with the other major nations experiencing the pains of a long and deep recession. This is shown in Figure 3.
Figure 3. OECD Nations' Projected Budget Deficits as a Percentage of GDP (nominal), 2010-2011
When placed in a proper historical, political, and international context, the current size of the U.S. budget is not cause for hysteria. However, the long-term budget picture is indeed grim, but this is mainly due to rising health care costs. That is, the best deficit reduction plan is not the spending freeze or a balanced budget amendment, but rather serious health care and health insurance reform.
