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Sunday, April 20, 2014

Responsibility for budget deficits not always clear

By Edward Lotterman

MarketWatch pundit Rex Nutting kicked up a lot of dust with a recent piece "Obama Spending Binge Never Happened," which compared the rate of spending growth under the last five presidents. He cited Congressional Budget Office data to show that the highest percentage rates of growth took place under Ronald Reagan and George W. Bush and the lowest under Barack Obama.

Critics immediately countered that Nutting was twisting the numbers, largely because he assigned fiscal year 2009 to George W. Bush, not Barack Obama. Reverse that, and Bush looks somewhat better and Obama worse. Who is right?

The important point to remember in all of this is that presidents have much less power over budgets and deficits than many people believe. The U.S. Constitution lays responsibility for taxing and spending squarely on Congress. No money can be spent unless appropriated by Congress. For about a century, legislation has instructed the president to submit a proposed budget to Congress. But this is not a constitutional requirement. He also can ask to have tax bills submitted by sympathetic Congress members. But the only real power the president has is in the veto.

Given that limitation, let’s look at how taxing and spending actually played out and what role presidents actually played.

Start with the question of who is responsible for the budget for fiscal year 2009. Fiscal years start five weeks prior to election day and four months before a new president is inaugurated. Moreover, it takes time for a new president to get tax and spending proposals to Congress, still longer for Congress to act and even longer for money to actually be disbursed or for tax rates to take effect.

Most economists, if forced to assign fiscal year 2009 to one president or the other, would assign it to Bush, not Obama. In particular, the argument that all of the Obama $800 billion stimulus package added to the deficit is bogus, for reasons I’ll explain. Obama’s opponents criticized the package because there were not enough "shovel-ready" projects for much spending to occur, and they were right.

However, about one-third of the package was tax cuts versus two-thirds via spending increases. The Congressional Budget Office estimated that the Obama stimulus increased the fiscal year 2009 deficit by $185 billion.

The tax cuts and spending increases in the stimulus were not the only changes sought by the new administration, however. There were other outlay increases. These included a boost in military outlays, some of which merely corrected for the habitual Bush practice of hiding part of the cost of wars in Iraq and Afghanistan in “emergency” supplemental appropriations.

In a separate study, the Congressional Budget Office estimated that with these factors taken together, the Obama administration increased the 2009 deficit by $280 billion compared to what it would have been if no legislation had been sought. That is about a fifth of the overall deficit of $1.4 trillion.

Some critics argue Obama is responsible for more than this Congressional Budget Office estimate, because Bush, at loggerheads for months with Democratic majorities in Congress, had left office without signing the final appropriations bill. Since it fell to Obama, they argue, he is responsible for the resulting deficit.

The problem is that the difference between appropriations passed by Congress and those requested by the Bush administration were not all that great. Most of the increases in outlays came from increases in Social Security, Medicare, Medicaid, unemployment compensation and food stamps, driven by laws already in effect. Bush never proposed legislative changes to cut those benefit formulas.

Thus, if you ask independent analysts what likely would have been different in 2009 appropriations if John McCain had won the election, most would respond “very little.”

But no one knows for sure.

Moreover, a $420 billion decline in tax revenues was a major contributor to the deficit. Some of this was due to the smaller Bush stimulus of mid-2008, some to the initial effects of the Obama tax cuts and much to the automatic revenue reductions that always result from a slowing economy.

One other issue is that of absolute versus relative changes in the national debt. Spending may have increased at a slower percentage rate under Obama, the argument goes, but in absolute dollar terms the national debt has increased more during his administration than ever before. That is certainly true, although if one adjusts for inflation, the contrast with the deficit binges from 1981 to 1994 are less stark.

It also is true that if spending has increased a lot under one’s predecessor, then slower growth in immediately subsequent years is easier because the absolute level begins higher. This certainly is a factor in the slower growth apparent for Clinton and Obama.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Reach him at ed@edlotterman.com

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