Pushing Back Against the Right’s Narrative on the Budget

The right, as has been frequently observed of late, has developed an “alternative-reality” view of how we have arrived at our current budget-deficit impasse, placing the blame squarely on the Obama administration and Congressional Democrats. A runaway federal budget since 2009 is the key element in their story. In a July 15th editorial (“The Obama Downgrade”), The Wall Street Journal states this view succinctly:

“The early George W. Bush years saw spending bounce up to a plateau of roughly 20% of GDP, but no more than 20.7% as recently as 2008. Then came the Obama blowout, in league with Nancy Pelosi’s Congress. With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945.”

The editorial is accompanied by a chart to illustrate the basic claim–witness the remarkable uptick of the curve between 2008 and 2009:

At first sight, the chart appears to sustain the WSJ charge and to indicate that federal spending under Obama is of a different order of magnitude from the past. For a moment, it shook my own antipathy to the Republican position; maybe, in all fairness, the blame deserves to be more evenly divided between the two sides of the political aisle. My curiosity aroused, I probed more deeply into the numbers (which come from the OMB website). I’d like to share what I discovered. I make no claims about any special knowledge of the intricacies of the federal budget, just an affinity with numbers.

If you have followed me this far, you may have guessed what is coming—the discovery of a deceptive use of data. It begins with a disturbing piece of disingenuousness, if not dishonesty, in the WSJ editorial, which places the responsibility for remarkably high level of fiscal year (FY) 2009 expenditures entirely at Obama’s door.  But a federal fiscal year begins on October 1 of the prior year, and the Bush White House was therefore the source of the FY 2009 budget passed by Congress and responsible for spending some of the money. The budget as proposed authorized $3.1 trillion in expenditures (and didn’t include the full costs of the Afghanistan and Iraq wars); actual expenditures rose to $3.5 trillion, an increase that does not appear so remarkable in light of the enormous economic turmoil of late 2008 and the first half of 2009. Unsurprisingly, a large part of the increase from the prior fiscal year, $260 billion, can be found in the human-resources category, as unemployment and Social-Security payments rose.

Then, there is the editorial’s insistence on viewing federal spending in relation to GDP. The problem is that the expenditures-to-GDP ratio has two sources of variation, not one. Indeed, the ratio is so high in FY 2009 in part because the GDP declined between 2008 and 2009 as a consequence of the recession. And it hasn’t risen much since. As a consequence, the ratio tends to inflate the apparent spending levels since Obama became President. It is useful, then, to look directly at the nominal levels of federal expenditure from year to year.

Looked at this way, the expenditures of the Bush years reveal a momentum of steady increase that averages $160 billion per year. In the first budget year that the Bush White House fully “owned,” FY 2002, expenditures amounted to $2.01 trillion (in nominal, not inflation-adjusted dollars); in the last, FY 2008, they rose to $2.98 trillion—in other words, an increase of just under $1 trillion. The drivers of increasing expenditures were mainly twofold: defense spending (two wars, of course); and human resources, with Social Security and Medicare sharing lead roles.

The same drivers have been at work so far during the Obama years, so the same momentum should be present. In fact, the expenditures in FY 2010 are almost exactly in line with the year-to-year increases of the Bush years: that is, the $3.46 trillion actually spent is not much above the $3.30 trillion one would anticipate by straightforward extrapolation from FY 2008 (see chart below). Given the slow recovery and high unemployment rate, the bump up seems reasonable.

OMB projects the FY 2011 expenditures to come in at around $3.82 trillion, admittedly a sizable increase from the prior year, but expenditures are then expected to level off. These projections may turn out to be off the mark. But the main point is that during the Obama years so far, with the exception of FY 2009, a year that the Bush administration at least partly owns, the year-to-year changes in federal spending are not much above those of the Bush years, and any differences seem easy to explain in terms of the needs of more economically difficult times.  There is no sign here of a runaway federal budget.

Intent on its narrative, the WSJ editorial omits any analysis of federal income, which, as is widely known, has reached its lowest level as a percent of GDP since the 1950s—14.9%. In nominal dollars, income fell during the early years of the oughts decade as a result of the Bush tax cuts and was just starting to recover when it dropped precipitously, by $400 billion, in FY 2009, because of the recession. Unlike federal spending, federal revenue is, in 2010, barely above (in nominal dollars!) what it was a decade before (see chart):

The big story, in other words, is not the rise of federal spending but the stagnation of federal receipts. Taking inflation into account, they have suffered a significant decline since 2000, of about 16 percent. There would seem to be no way to rectify the budget situation without doing something to correct this slide downward.

The WSJ editorial gets it exactly wrong!