Download Deficit Debt etc

Deficit Debt etc
Since then four things have served to change that expectation again. There were dramatic
stock market declines in 2000 and 2001, there was the recession of 2001 and anemic
growth in 2002, the two substantial Bush tax cuts in 2001 and 2003, and finally the
impact on military and domestic security spending resulting from September 11th.
The dramatic turnaround in the deficit picture that occurred between 1996 and 2001
resulted from dramatically a nearly 50 percent increase in taxable income. About a third
of that increase resulted from a sky-rocketing stock market. From 1991 to 2000 taxable
capital gains income increased from just over $100 billion to more than $630 billion. As a
result a deficit that had been approaching $300 billion in 1992 turned into a $236 billion
surplus in 2000.
Beginning in 2000 things began to unravel. In March, the stock market reached its peak
(12,000 on the Dow Jones and 5,000 on the NASDAQ) and began a two-and-a-half year
decline (7,500 on the Dow and 1,200 on the NASDAQ). Taxable capital gains income
was cut by more than half in time. In November of 2000 we had an election where it took
a month of court battles to decide who won the Presidency. By the time George W. Bush
took office the economy was in recession and unemployment was on the rise. He
delivered on a promised a tax cut in the spring of 2001 that further diminished revenues.
Finally, of course, the attacks of September 11th resulted in vast increases in government
spending for reconstruction as well as military and domestic security. By 2003 the total
budget deficit was approaching $300 billion.
Economists who think deficits can be used to stimulate a lackluster economy consider
that part of the deficit attributable to the “stimulus package” useful and label it functional
finance.
Both proponents and opponents of such an amendment point to the behavior of the states
during the 1990s and early 2000s. Opponents note that the fiscal crises the states
experienced in the 2002 and 2003 were as a direct result of the constitutional
requirements to have balanced budgets. Though the constitutions of the states are varied
in this regard they generally suggest that they spend no more than the revenue for that
year plus their built-up reserve. This essentially requires that they have a cyclically
balanced budget; one that is in balance over the business cycle. An annually balanced
budget requirement would not let a state create or utilize a reserve. Proponents of a
federal balanced budget amendment suggest that most states were doing very well until
1999 and 2000 when they had built up substantial reserves. Had the recession began two
years earlier, most states would have been in a good position to withstand it.
Unfortunately, once the recession began in 2001 they had already frittered most of it
away on tax cuts and new spending.
In the movie Major League, a 1989 baseball comedy, the character played by real-life
Milwaukee Brewers announcer Bob Uecker suggests that a pitch that ends up in the
stands was “juuuuuust a bit outside.” In terms of projecting the deficit/surplus picture the
Congressional Budget Office and the Office of Management and Budget have similarly
missed the target. In 1990 both were projecting “deficits as far as the eye could see.” In
1995 they each projected a shrinking deficit. Five years later they projected that “we
would be debt free by 2010.” Two years after that it was deficits now, surpluses later.
Figure 10.6 illustrates the rapidly changing projections, but the year 2003, in particular,
illustrates the degree of misestimation. In 2000 the prediction for 2003 was that there
would be a surplus approaching $350 billion. In 2002 the projection was for a $150
billion deficit. The year actually came to a close with a deficit of more than $300 billion.
How could they get it so wrong, so often, and still be given any credibility. In an April
2003 report, The Congressional Budget Office makes a pretty good case that it wasn’t
their fault. They argue that taking into account the things that occurred during this period
they did a pretty good job in short-term projections. They also argue that longer term
projections are given more weight than they are due.
Consider these factors: No one foresaw that the economy would grow at twice the
projected rates in the late 1990s. No one projected that the stock markets would grow as
quickly as they did during this period such that taxable capital gains income would
increase 700 percent. No one projected that the 2000 Presidential election would insert so
much uncertainty into the economy and push it into a recession in 2001. They had no way
of knowing in 1995 that George W. Bush would take over as President and get a tax cut
enacted in 2001 and 2003. They certainly could not have taken into account in 2000 that
Al-Qaeda would attack the U.S. nor that we would respond by going to war in
Afghanistan and Iraq in 2002 and 2003.
Off-Budget
Year
Deficit/GDP
1992
1996
2000
1991
1995
1999
1980
1976
1972
1968
1964
1960
1956
1952
1948
1944
1940
1988
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35
1987
Total
1984
Year
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1943
Year
Deficit/GDP
Real Deficit/surplus
300
200
100
0
-100
-200
-300
-400
-500
-600
1.4
1.2
Debt/GDP
1
0.8
0.6
0.4
0.2
0
1940
1950
1960
1970
1980
1990
2000
Year
Publicly held debt
Total debt
1958
1976
Percentage federal debt
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1940
1946
1952
1964
1970
1982
1988
Year
Trust funds
Federal reserve
Public
1994
2000
700
500
300
100
-100
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
-300
1985 Outlook
1990 Outlook
1995 Outlook
2002 Outlook
2003 Outlook
Actual
2000 Outlook
Figure 10.6 Deficit and Surplus Projections of the Past
Source: http://www.cbo.gov
"The Budget and Economic Outlook: An Update," 1985 – 2003