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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