The Attack Of The Strawman Deficit

Bite me!

Before we get down to examining Megan McArdle's views on the deficit and handing out Cookies Of Gratitude to the many wonderful people who correct her so we don't have to, let us pause to note one great advancement in the march of human history.

Naturally saying that neither party is particularly credible on the deficit right now has drawn a lot of angry people out of the woodwork to say that I am ignoring the clear evidence that Democrats/Republicans are better. Well, I've looked at the evidence, and to me it's not that clear. [my bold]

That's right, ladies and gentlemen! Liberals have been promoted to the status of people! Yay, us!


Hurrah!

Unfortunately that promotion seems to be unpopular with her audience. Despite their protestations of clear-sighted balance, most are conservative and don't like to be told that the Republicans are as bad as the Democrats.

But let's start at the beginning: Travel back in time with me to October 29, when we at the Snark were otherwise occupied with the approaching holiday festivities.

Which Party Is Better on the Deficit?

I'm seeing a lot of worry that if Republicans take Congress, it will be bad for the deficit, because they're not serious about deficit reduction.

It seems the deficit is one of our economy's most serious and enduring problems, greater than any other problem in the history of this recession. The deficit is stalking the land, ready to swallow anything it sees like a giant stalking Cyclops of fiscal imprudence.

I agree that they aren't serious--but this has less bite than it might, because I've seen little evidence that the Democrats are serious. An enormous amount of the "Democrats are serious" credibility is borrowed from the Clinton years. Even crediting Clinton with 100% of that, and the Republican Congress with none--an interpretation I think rather far-fetched--that was over a decade ago. What have they done for us lately?

Don't get me wrong, I think that Republicans are deeply, terrifyingly unserious about raising taxes and cutting spending. But I think that Democrats are also deeply, terribly unserious about doing those things. I think that Republicans are worse on the tax side, but I think Democrats are worse on the spending side, and it's far from clear to me that on balance, the Democratic position leads to net deficit reduction over the Republican alternative.

And here we see the premise that will soon get McArdle into hot water. McArdle tries to say that the Democrats are the big spenders who will crash the economy with their big spending. She can't support this statement and if you look carefully you'll see she doesn't even try; she just blames "pre-existing Democratic priorities." Other bloggers tries to understand her analysis, examining her data and trying to follow her logic but there is no data or logic because Megan McArdle thinks enacting health insurance reform in 2014 has exploded Obama's present deficit.

...The problem is that even if all the Medicare cuts work, we're still left with a really big deficit problem--and we have already "spent" the arsenal of revenue enhancers and spending cuts that would otherwise have been our first line of defense against fiscal disaster.

So while I worry about Republicans passing irresponsible tax cuts, I worry equally about Democrats passing irresponsible spending programs that pay lip-service to the notion of deficit reduction, while in fact making it more likely that America will end up in a crisis. You can argue that American really needed health care reform, but the Republicans would say the same about tax cuts. At that point, you're obviously not that interested in the deficit; you're simply saying that the stuff my side wants to do is worth risking the country's financial future, while the stuff the other side wants to do isn't. Okay, maybe, but that isn't going to make the resulting deficit any less . . . um . . . deficit-like.

McArdle's next article attempts to bolster her claim that Democrats are as bad or worse than the Republicans when it comes to the economy. She achieves this goal by simply declaring that anything good that happened under Democratic president didn't count, while anything good that happened under a Republican president did. She gives Bush I credit for Clinton's surplus and ignores the fact that Bush had to raise taxes after cutting them to please the base.

As you can see, the Bush [I] deficit reduction package is very competitive, though it included some temporary deduction phaseouts that boosted the tax take. On the other hand, Clinton got to enjoy the fruits of the 1991 and 1993 base-closing commissions in the wake of the end of the Cold War, so I'm not inclined to dock him all that much for this.

Bush's actions on the deficit helped cost him the election.

Bush's broken promise to not raise taxes helped cost him the election. Does she think we were all born yesterday?

I'd call him a Hero of Deficit Reduction, First Class--without him, Clinton's surpluses would never have been possible.

Looking at our small group of post-1980 presidents, we have two GOP presidents who increased the deficit, one GOP president who took major steps to close it, one Democratic president who took steps to close it. The "Dems good, GOP bad" has another problem, of course: Barack Obama., the Democratic president who has set spending records as revenue collapsed. Maybe he's planning a secret surprise where he balances the deficit in 2014. But there's not really all that much evidence for this proposition, beyond the fond hopes of those making it.

So while, yes, we have one more "bad Republican" than "bad Democrat", that's out of a group of five--not particularly compelling evidence.

McArdle flawed argument has been refuted but we all know that something can be technically true and collectively nonsense.

Meanwhile, The New York Times printed a chart showing How Trillion Dollar Deficits Were Created. At the bottom we can see "Other Obama programs" add $56 billion to the deficit, while Bush's policies, for example, added $673 billion.

Paul Krugman added:

Even More On The Origins of the Deficit
I’ve thought of another way to present the data on GDP, spending by all levels of government, and taxes. Let’s look at trends in GDP, spending, and revenues over two periods — one designed to capture “normal” growth, the other the economic crisis.

For the first period, I look at trends from the business cycle peak in the first quarter of 2001 to the peak in the last quarter of 2007. This is a standard way of measuring economic trends, by the way, since business cycle peaks presumably measure the economy’s output at or near capacity. And yes, this means that I wrote this post in a fit of peaks.

For the second period, I use the quarters since that 2007 peak.

So here’s what you get:

[chart]

During the pre-crisis period, spending grew slightly faster than GDP — that’s Medicare plus the Bush wars — while revenue grew more slowly, presumably reflecting tax cuts.

What happened after the crisis? Spending continued to grow at roughly the same rate — a bulge in safety net programs, offset by budget-slashing at the state and local level. GDP stalled — which is why the ratio of spending to GDP rose. And revenue plunged, leading to big deficits.

But I’m sure that the usual suspects will find ways to keep believing that it’s all about runaway spending.

Ezra Klein said:

McArdle has two examples of Democrats not only trying to pay for things, but making unpopular choices to pay for things. Then she's got a bill in which Democrats decided to pay for more than the whole thing, and made a bunch of unpopular decisions to do so -- decisions which Republicans are attacking mercilessly. And this is her evidence for a post which asks the question, "Which Party Is Better on the Deficit?" and finds it impossible to answer.

And Marshall Auerback at Naked Capitalism writes On McArdle's Fuzzy Deficit Accounting:

In 2005 tax revenues were humming, with a growth rate of 15% per year—far above GDP growth–hence, reducing nongovernment sector income—and above growth of government spending, which was just above 5%. As shown in the figure above, such fiscal tightening invariably results in a downturn. When it came, the budget deficits increased, mostly automatically. While government consumption expenditures remained relatively stable over the downturn (after a short spike in 2007-2008), the rate of growth of tax revenues dropped sharply from a 5 % growth rate to a 10 % negative growth rate over just three quarters (from Q 4 of 2007 to Q 2 of 2008), reaching another low of -15% in Q1 of 2009. Transfer payments, as expected, have been growing at an average rate of 10% since 2007. Decreasing taxes coupled with increased transfer payments have automatically pushed the budget into a larger deficit, notwithstanding the flat consumption expenditures. These automatic stabilizers and not the bailouts or much-belated and smaller-than-needed stimulus are the reason why the economy hasn’t been in a freefall a la the Great Depression. As the economy slowed down, the budget automatically went into a deficit putting a floor on aggregate demand.

As estimated by the New York Times, even if we were to eliminate welfare payments, Medicaid, Medicare, military spending, earmarks, social security payments, and all programs except for entitlements, and in addition stopped the stimulus injections, shut down the education department, got rid of a number of other things and doubled corporate taxes on top of all of this, the budget deficit would still be over 400 billion. This further demonstrates the non-discretionary nature of the budget deficit. And of course this doesn’t take into consideration how much more tax revenues would fall and transfer payments would rise if these cuts were to be undertaken. With the current automatic stabilizers in place, the budget cannot be balanced, and attempts to do so will only cause damage to the real economy as incomes and employment fall.

But this set of facts is much less attractive, apparently, than simple Obama bashing.

(McArdle showed up in comments on that post, which is always fun.)

McArdle tries to tell us that "...a lot of [Obama's spending] is also discretionary, and given the way that many of those funds were used to target pre-existing Democratic priorities, Republicans have a right to argue that this can't all be simply written up to the recession." And "...either way, I don't think you can ignore the huge leap in government spending that has taken place during the first two years of Obama's term." Yet Obama-only programs have added $56 billion to the deficit and "Obamacare" won't be funded until 2014, so we fail to see how McArdle has even begun to support her emotion-based assumption that Obama is a big spender.

In conclusion:

On health care, I think it's likely that the GOP will try to defund much of the health care bill, while leaving the pre-existing condition rules, and perhaps the addition of adult children to their parents' health insurance. If that happens, health care reform will collapse under its own weight, perhaps taking the US insurance market down with it.

Just the insurance market? Why not all medicine, for all time? Tune in next week when Megan McArdle declares that thanks to President McSpendypants, all doctors will Go Galt and mow their own lawns instead of healing the foolish, ungrateful masses.