Debunker: It's the spending, stupid

Just as the ball dropped in Times Square at midnight on New Year’s Eve, the United States went over the fiscal cliff. As in the case of the Mayan apocalypse, the world didn’t come to an end ??? on Jan. 2, President Obama signed into law a deal to kick the hand-grenade down the road another two months, postponing ???sequestration??? until March 1.

According to the president, this deal ???reduces the deficit by raising $620 billion in revenue.???


Obama is comparing this deal (making the Bush tax cuts permanent for all except the top one percent) to a fantasy ??? a deal extending all the Bush tax cuts. A more realistic comparison would be to what actually would have occurred in the absence of a deal. According the Congressional Budget Office: ???Relative to what would have occurred under the laws previously in effect, this legislation will increase budget deficits in coming years.??? (Emphasis in original)

???Relative to the laws in place at the end of 2012, we estimate that this legislation will reduce revenues and increase spending by a total of nearly $4.0 trillion over the 2013-2022 period,??? finds CBO. Contrary to reports that the deal includes ???$15 billion in net spending cuts,??? CBO says the deal ???will boost deficits by increasing spending, mostly for refundable tax credits and unemployment compensation.??? Including interest, the deal amounts to ???additional deficits between 2013 and 2022 of roughly $4.6 trillion.???

Without a deal, CBO projected that the economy would ???contract at an annual rate of 1.3 percent in the first half??? of 2013, increasing unemployment to 9.1 percent. This, according to CBO, ???would probably be judged to be a recession.??? This recession would last six months; the economy would then ???expand at an annual rate of 2.3 percent in the second half??? of 2013.

The politicians are patting themselves on the back for averting recession in the short term, but in the long run, according to CBO, this deal ???will lead to lower output and income later in the decade than would have occurred under prior law.??? (Emphasis in original) That’s because it ???expands budget deficits???which will reduce national saving and lower the stock of productive capital, thereby reducing output relative to what would have occurred under prior law.???


In coming months President Obama will have to make tough decisions over the debt ceiling and the delayed sequestration deadline. Both are consequences of our exploding national debt, fueled by budget deficits. These deficits are not the result of declining revenues: Federal revenues were 24 percent greater in 2012 than in 2001, when the US government ran a surplus; the problem is that since then, spending has more than doubled, rising from 18.5 percent of Gross Domestic Product in 2001 to 24.3 percent of GDP in 2012.

Focusing on revenues is a distraction; the urgent problem is spending, particularly entitlement reform. Revenues this year are projected to exceed $2.9 trillion ??? more than the record $2.6 trillion generated in 2007, at the peak of the boom. If Obama were to cut spending to 2007 levels, instead of running another deficit he would run a surplus of more than $170 billion.

The president might face another recession in the short term, just as Ronald Reagan did ??? but instead of adding to the debt, Obama could begin paying it down. The Democrats might get hammered in the 2014 mid-terms ??? just as the GOP got hammered in the 1982 mid-terms ??? but that’s a price a leader of character will pay, to lay the foundation for long-term prosperity.