Does President Obama Really Believe in Deficit Reduction?

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Charles Dharapak / REUTERS

U.S. House Speaker John Boehner and Vice President Joe Biden stand to applaud as President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington, Feb. 12, 2013.

It should come as no surprise that President Obama began last night’s State of the Union address discussing both the economy and federal government finances. After all, much of the debate in Washington has been focused on the historically large budget deficits the federal government has been running since the financial crisis. The President called for Congress to act to reduce the deficit by $1.5 trillion over the next ten years, through a combination of tax increases and spending cuts, but he offered no real specifics on how he’d like to get there. And that lack of specifics, combined with spending proposals elsewhere in the speech, have made many Republicans skeptical that the President considers deficit reduction a priority.

This sounds like the same old story we’ve been hearing for years now: Republicans accusing the President of not really caring about deficits and debt. But given the improving economy and deficit reductions already in place, Republicans may have a point this time around. Does the President really want further deficit reduction? And, perhaps more important, should he?

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President Obama has always at least paid lip service to the idea that the deficit and debt pose a threat to the American economy. He was in office for less than a month before he convened a “fiscal responsibility summit” at the White House — where he and Congressional leaders discussed ways to reduce the budget deficit, which was 10.1% of GDP in 2010. And in 2011, under serious pressure from Congressional Republicans who refused to raise the debt ceiling without spending cuts, the federal government enacted a series of budget cuts and limits to future spending increases, which cut the ten year budget deficit by $1.5 trillion when compared to the 2010 baseline. Last year further deficit reduction of $647 billion was achieved mostly through tax increases on those earning more than $400,000 per year ($450,000 for couples).

Furthermore, the recovering economy has done its part to reduce the deficit on top of measures taken to trim spending and raise taxes. According to a recent Congressional Budget Office Report, the 2013 budget deficit will be 5.3% of GDP — nearly half of what it was when the President took office. The report also showed that the growth of healthcare spending continues to slow, which may be due to structural changes in the healthcare system introduced by the 2010 healthcare reform law. Both of these dynamics have combined to show the total debt remaining somewhat steady between 72.5% and 77% of GDP in the next ten years.

In other words, the budget picture has improved markedly. But how much is enough? The supposed reason the President is calling for $1.5 trillion of further reductions is because that would put the total reduction in line with what the Bowles-Simpson comission decided in 2010 was needed to stabilize the long term debt picture. But the baseline assumptions of Bowles-Simpson included the expiration of the Bush tax cuts on workers making more than $200,000, as well as draw down from war efforts – meaning that the commission called for $4 trillion in savings on top of those cost savings. So the President’s $4 trillion and Bowles-Simpson’s $4 trillion are not the same thing.

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Meanwhile, many economists continue to believe that our total debt as a percentage of GDP is too high. Indeed, there is evidence that debt levels in the 70% range can slow economic growth by reducing private investment (if private companies are lending the government money, they aren’t investing it in their businesses). High debt levels may also prevent the government from effectively responding to another crisis — be it a recession or some sort of national security emergency.

But the idea that debt at 77% of GDP is dangerous while 35% or some other number is not is, for now, just a theory. There isn’t a ton of historical data to draw from, given that the international monetary system we find ourselves in is just 40 years old. After all, Japan’s government has a debt-to-GDP of well over 200% but can still borrow freely and at very low rates in the bond market.

On top of this, we remain in a depressed economy with high unemployment and total output far below our potential. Government spending cuts will — at least in the short term and possibly in the long term as well — exacerbate that problem. And some experts even believe that further deficit spending now could actually improve our long term budget picture by putting more people back to work and jump starting the private sector.

All that is to say that conservatives may be right in their suspicion that President Obama isn’t committed to further deficit reduction. There has already been significant spending caps and reductions, paired with tax increases on the wealthy. Whether we need more deficit reduction now is a matter of economic debate, and there is intellectual backing for the idea that further deficit reduction would be counterproductive in terms of both unemployment and debt reduction.

So even though President Obama nodded to the deficit hawks in last night’s speech, don’t be surprised if that was just politics. Polls going into the speech showed that the deficit was the second biggest concern for Americans, after the broader economy. The President of the United States can’t entirely ignore that sentiment. But he may simply believe that it’s wrong — and be planning to act (or not act) accordingly.

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18 comments
bambibenton2
bambibenton2

Why starve the economy to feed the government?

Federal spending sends dollars into the economy. Federal taxes take dollars out of the economy. When federal spending exceeds taxes, more dollars go into the economy than come out. This is the government’s deficit and the economy’s profit.

Our political leaders, the media and the old-line professors are fixated on the health of the federal government’s finances. They are fixated on what they call the “federal deficit” and the “federal debt.” But the problem is not the finances of the government which, being Monetarily Sovereignnever can run short of dollars. The problem is the finances of the economy which already has run short of dollars.

The bigger the so-called federal “deficit,” the bigger the economy’s profit. Why worry about the federal “deficit,” when we really should worry about the economy’s lack of profit?

The federal government is not in recession. The economy is in recession. So why starve the economy to feed the government?

Unemployment is not a problem for the federal government; unemployment is a problem for the economy. So why do the Tea Party, the Republicans and even the Democrats starve the economy to feed the government?

Poverty, loss of home, bankruptcy, illiteracy are not problems for the government; they are problems for the economy. So why cut the federal deficit and starve the economy to feed the government?

When federal spending exceeds taxes the economy makes a profit. To recover from the recession and to grow, the economy needs profits. So why cut spending and increase taxes? Why starve the economy to feed the government?

jthompson228710
jthompson228710

do you people know that the deficit has done nothing but decline since he's been in office? and the economy has gone up.

cyberjackguy
cyberjackguy

Christopher, thank you for your forthright response. What this nation needs acutely is honest and thorough journalism.

cyberjackguy
cyberjackguy

Well it looks like nobody even reads this blog. Does anybody even read the magazine anymore. I am glad that I have not invested in this venture.

rjsigmund
rjsigmund

all we need to do is put people back to work; under current law, the CBO expects a decline in the federal budget deficit from 7% of GDP in 2012 to 5.3% this year, and then as a recovery takes hold in fiscal 2014, further declines to 3.7% of GDP, and then to 2.4% of GDP in fiscal 2015, at which time the economy will be growing faster than 4% per annum and revenues will be 25% higher than currently...see the graph:

http://2.bp.blogspot.com/-9I76C7fG0Uk/URFrzEyOGvI/AAAAAAAAYUE/_QXguWW4W18/s1600/DeficitCBO.jpg

danfangmeierwork
danfangmeierwork

 I would like to see the Republicans cut spending when they are in the White House. Republicans increase the yearly deficit (See Reagan/Bush). Then it goes down when Dems are in the White House (Clinton/Obama).

bryanfred1
bryanfred1

Citing Japan as an example of why a high debt to GDP ratio is not a problem completely torpedoes that argument.  Japan has been in a rut for going on 30 years since its real estate bubble burst in the 1980s despite big increases in government spending designed to stimulate the economy.  Sound familiar?

fitty_three
fitty_three

There is no question that Obama does, however, he believes that deficit reduction needs to be accompanied by tax increases on wealthier Americans so that the impact of cuts on the middle class won't be so severe.

That's the long and the short of it.

The GOP believes that the burden of deficit reductions needs to be born by the middle class alone.  You have doubts?  Look at their legislative history and their rhetoric for the past few years.

Crack
Crack

It Sure Feels Like A Recession - While stocks suggest all is well, one glance at the following chart of US, Europe, and Asia (ex-Japan) EBITDA tells a very different story - http://www.miguelangeldiez.com/mercados

bambibenton2
bambibenton2

@cyberjackguyWhat would you say if I told you the total number of hits the Chicago Cubs made in 2008 is 47% of the total number of runs the Cubs have scored in all of their 100+ year history? You might well say, “Huh? What does one thing have to do with the other? One is hits; the other is runs. One is 100+ years; the other is one year. It’s classic apples vs oranges.” And you would be right.

Yet, that is exactly what the debt/GDP ratio represents. Federal “debt” is the net amount of outstanding T-securities created in the history of America. The GDP is the total dollar value of goods and services creating this year. The two are unrelated. The federal government does not use GDP to service its debt. In fact, federal debt service stimulates the economy, so more debt is stimulative.

Actually, federal “debt” is not even related to federal “deficits” by function, though the two are related by law. During the gold standard days, the Treasury was required by law to issue T-securities in the amount of the federal deficit. It was necessary then, because the Treasury could only produce money in the amount of gold reserves. In 1971, we went off the gold standard, which gave the Treasury the unlimited ability to create money. The creation of T-securities no longer is necessary; it is a relic of the gold standard days. A government with the unlimited ability to create dollars does not need to borrow those dollars.

The government “borrows” by creating T-securities out of thin air, backed only by full faith and credit, then exchanging these T- securities for dollars it previously had created from thin air, which it destroys. The government just as easily and as prudently could create dollars from thin air, also backed only by full faith and credit, and dispense with the creation and sale of T-securities. That would reduce and ultimately eliminate federal debt, and over time the debt/GDP ratio would = 0. Perhaps that would make the debt hawks feel better, but fundamentally nothing will have happened.

Christopher_Matthews
Christopher_Matthews moderator

@cyberjackguy It's the difference between debt held by the public and total debt including what the government owes itself through borrowing from the social security trust fund. It's standard practice among economists to focus on debt held by the public.

Christopher_Matthews
Christopher_Matthews moderator

@bryanfred1 There are several main arguments for why high debt levels are bad. One of them is that it will cause interest rates to rise. That certainly hasn't happened in Japan. Another argument is that high debt levels crowd out private investment and are a drag on growth. You could definitely make that argument in the case of Japan, but there is a chicken and egg question there. Did high debts cause slow growth or vice versa?

bryanfred1
bryanfred1

See recent comments by Harry Reid and Howard Dean regarding the need to get more tax revenue out of the middle class.  If you taxed the >$250k bracket at 100% you still couldn't cover the deficit and they know that.  Of course that's not what they told voters before the election.

cyberjackguy
cyberjackguy

@Christopher_Matthews @bryanfred1 Christopher you did not mention the other thing that high debt causes. That is high amounts of interest that the gov. must pay out in order to maintain the full faith and credit of the US. Right now the amount is approx 223 billion. That is a lot of interest. The point is that none of the outlay will be used to fund the operations of the Federal Gov. Tis a pity, that money will pay for a lot of government. So if the debt rises to the Japanese level how much government will we then not get for our money? Like some people like to say, this is not rocket science. It is just old fashioned accounting.

cyberjackguy
cyberjackguy

@Christopher_Matthews @cyberjackguy @bryanfred1 Here in lies the problem. The President is the master of obfuscation. There should be no question on anyone's mind about where this President, or any president stands on fiscal matters. The record of this administration is clear. This president is a poor steward of the peoples money. I for one think that a debt of almost 17 trillion is a sin. To not work as hard as possible to bring it back down to earth shows what the President really feels about us. This burden of debt is crushing this nation.

Christopher_Matthews
Christopher_Matthews moderator

@cyberjackguy @Christopher_Matthews @bryanfred1 Sure, higher debts will mean higher interest payments, but that doesn't necessarily mean we have to cut spending now. The question is: How much debt is too much debt? There's lots of great research out there that argues were very close to too much debt. There's a lot of great research out there that suggests we'd be fine with significantly more debt. We're unfortunately in uncharted territory with regards to some of this stuff, and I'm merely trying to decipher out which argument the President believes.