As recently as last fall, the mantra in the Bush administration was that the federal deficit, at 1.2% of GDP in FY 2007 and 1.9% in FY 2006, was smaller than the average of the previous 40 years. It was a true statement, although the choice of 40 years was interesting. If you’d gone with 60 years, or just the post World War II era, only the FY 2007 deficit would have qualified as below average.
But with the White House Office of Management and Budget now forecasting a deficit of $389 billion, or 2.7% of GDP, for the fiscal year ending in September, and $482 billion, 3.3% of GDP, for FY 2009, it’s important to note a couple of caveats. It’s not that the $482 billion is in any meaningful sense a “record,” as the headline on most news accounts went. As a percentage of GDP, deficits were much bigger during the Reagan and Bush 41 administrations (not to mention World War II). But the new deficit projections do call into question the argument that Bush 43 deficit spending has been below average. And, more important, they understate the real deficit.
It’s patently silly to brag about a particular year’s deficit being under the historical average. I for one am thrilled that this year’s deficit will be above average–the economy needs the help. What really matters is the size of the deficit over the course of a business cycle. The last recession ended in the latter half of 2001; let’s say we do have a recession starting sometime this year and it ends late this year or early next. So FY 2002 through FY 2009 seems like an okay proxy for the cycle–and also, lagged by about half a year, the Bush administration. What’s the average deficit over the period, if the OMB’s forecasts are right? 2.5%, or just above the 2.4% 40-year average. If you go FY 2001 through FY 2008, though, it’s 2%–below average. So the Bush record has not been bad, I’d say. Not great, either. But not wildly profligate by historical standards. The same is true when you look at the money the federal government owes to investors here and abroad: At an estimated 38% at the end of September, it’s below the 40-year average of 41%.
The problem is that these figures tell only part of the budget story. The deficit numbers released by the OMB include Social Security, which is currently running a surplus. But the debt measure favored by OMB excludes the trillions of dollars in U.S. bonds owned by the Social Security Trust Fund that it will start cashing in when those annual surpluses disappear just under a decade from now. It strikes me that it’s intellectually justifiable to do one of those things or the other, but not both.
What happens when you remove Social Security’s impact from the deficit numbers? The OMB doesn’t say in its latest report, but by combining its latest forecasts with more detailed data it released earlier this year, I get a shortfall of 4% of GDP this year and 4.7% next. For FY 2002-2009 the average is 3.9%, for FY 2001-2008 it’s 3.4%. The 40-year average: 3%. The verdict: Markedly higher-than-average.
Then there’s the debt. Include what’s owed the Social Security Trust Fund and other government entities, and it will be about 67% of GDP in September, estimates the OMB. That’s well above the 40-year average of 50%. It’s still far from any kind of record: The debt was slightly bigger as a share of GDP in the mid-1990s, and much higher in the 1940s and early 1950s (as we paid down the debt from World War II). But it’s pretty troubling.
Oh, and the real picture is probably worse than the OMB’s numbers, even the Social-Security-adjusted numbers, make it out to be. And I’m not counting the net present value of future Medicare commitments or anything like that. I’ll leave that to the total gloomsters. But I think the inevitable conclusion is that Bush administration fiscal policy, while not the end of the world, has left us markedly worse off in purely budgetary terms.