July 13, 2006
Federal Revenues IV Posted by John Steele Gordon at 09:15 AM EST First, he writes that “the deficits of today are dangerously high, and this is principally because of the Bush tax cuts.” 1) Are the deficits of today (by which I presume he means the Bush years) dangerously high? Danger, of course, especially in economic matters, is usually recognized in retrospect. But let’s compare today’s budget deficits with those of the recent past. If we include the latest estimates for fiscal 2006, the annual deficit for the six Bush years has averaged 2 percent of GDP. In the last forty years, the annual deficit has been below 2 percent of GDP fifteen times and above it twenty-five times, sometimes way above it. Between 1975 and 1995 the deficit fell below 2 percent exactly once (1979, when it was 1.59 percent) and rose as high as 5.88 percent (in 1983). It was above 3 percent for thirteen of those twenty years. So if the deficits are “dangerously high” now, they must have been catastrophic then. And yet the country seems to have survived quite handily. Another way of measuring American deficits and debt is to compare them with those of other countries. France, Germany, Japan, and Italy all have higher national debts, measured as a percent of GDP, than does the United States. Ours right now is about 64 percent of GDP. Japan’s is 170 percent of GDP. The average deficit in the euro-zone in 2005 was 2.4 percent of GDP. In the United States it was 2.5 percent. Germany’s deficit that year was 3.3 percent, Britain’s 3.6 percent, Italy’s 4.1 percent. So, again, if our deficits are “dangerously high” those of many other countries are far worse. If you subtract the increased military spending caused by the War on Terror (wars historically being always financed by debt), the federal budget would be close to balanced. If you add in the surpluses most state governments have been running in recent years, which gives a better comparison with countries that are not federal in nature, the American total governmental deficit is actually very small, in both comparative and absolute terms. 2) Are the deficits principally due to the Bush tax cuts? Unless Mr. Zeitz has made a breakthrough worthy of a Nobel Prize in economics, there is simply no way to allocate the deficit among all the factors that contribute to it: taxes, spending, monetary policy, bridges to nowhere, etc., etc., etc. We will never know what would have happened if there had been no tax cuts in 2003. We do know this, according to a Wall Street Journal editorial this morning that I recommend reading: In the nine quarters preceding the 2003 tax cuts (i.e. since George W. Bush became President), GDP grew at an average annual rate of 1.1 percent. In the twelve quarters since, economic growth has averaged 4 percent. Again, it could be mere coincidence, but if Man A fires a gun and Man B across the room immediately drops dead of a gunshot wound, Ockham’s Razor says it’s highly probable that Man A shot Man B. Economic growth accelerated sharply virtually the instant the tax cuts went into effect and federal revenues stopped declining and started growing at precisely the same instant (and are now growing so quickly that The New York Times felt compelled to make the story its lead the other day). If you were to ask William of Ockham if there is a strong causal link between the 2003 tax cuts and the gushing federal revenues and rapidly declining deficits of 2006, I’m confident he’d say, “What, are you crazy? Of course they’re strongly linked.” Second, Mr. Zeitz takes me to task for comparing the deficit in 2004 with that of 1865, arguing that 1865 was an outlier year because of the Civil War. He writes, “had Mr. Gordon chosen another year to compare with FY 2006 [in fact I was comparing it with FY 2004, the worst deficit year under President Bush]—say, 1880, or 1890 [which in fact were years of large surpluses]—I suspect he’d have found that current budget deficits as a percentage of the GDP are outrageously high. I imagine that’s why he chose 1865.” No, I chose 1865 to demonstrate my point, which was that the description in The New York Times of 2004’s deficit being “an all-time high” was nonsense. Naturally, I chose the year that is in fact the all-time high in budget deficits, using a yardstick of which Mr. Zeitz thoroughly approves: “Mr. Gordon is absolutely correct to insist that we compare current and past budget deficits in relative terms—that is, as a percentage of the GDP.” I would suggest Mr. Zeitz reread what I wrote and see if he’d like to revise and extend his remarks, as they say in Congress. As for current deficits being “outrageously high,” I demonstrate above that they are no such thing. Finally, Mr. Zeitz seems outraged that I accused him of reading only The Nation and The New York Times, writing that since I’ve never met him, I haven’t the faintest idea what he reads. Of course I don’t. I was being what I thought was obviously sarcastic. I’m glad to hear that he’s as much of a magazine and newspaper junkie as I am.
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