Deficits Redux — Don’t Forget Interest Costs
http://www.offthechartsblog.org/deficits-redux-%e2%80%94-dont-forget-interest-costs/
Posted by: Kathy Ruffing
Posted in: 2001/2003 Tax Cuts, Deficits and Projections, Federal Budget, Taxes and the Economy
A recent Heritage Foundation backgrounder would have you believe that President Bush’s tax cuts, two wars, and a new prescription drug program under Medicare “play a relatively minor role in the growth of future deficits.” Quite the contrary, the tax cuts alone are a huge factor.
In 2019 alone, the Bush-era tax cuts (assuming that lawmakers extend them) plus interest would cost over $700 billion, or more than half of the roughly $1.3 trillion deficit we project for that year if the federal government continues current tax and spending policies. (Heritage understates the real effect of the tax cuts on the deficit by ignoring the increase in interest payments they cause The government has to borrow to make up for the lost revenues, which leads to larger debt and higher interest costs.)
This doesn’t mean that we could solve the entire long-term deficit problem simply by letting the tax cuts expire as scheduled. But it does mean that both sides of the budget — expenditures and revenues, including the tax cuts — need to be on the table when serious conversations about deficit reduction begin.
Heritage’s backgrounder is part of a continuing effort by some critics to absolve President Bush of the blame for current and future deficits and shift attention to other factors, such as the new policies of President Obama and the 111th Congress. But their arguments don’t add up, as we explain in today’s updated paper.
More About Kathy Ruffing
Kathy Ruffing is a Senior Fellow at the Center on Budget and Policy Priorities, specializing in federal budget issues.
Full bio | Blog Archive | Research archive at CBPP.org
To take on the actual Heritage piece you referred to:
1. Myth #1 conflates two things, the projected budget over time and the actual budget effect over the last 9 or so years. They slide that by as if the important number was a projected budget surplus. Who in their right mind would think that? They list the $1.7T cost of the GWBush tax cuts but then minimize that by comparing that cost to the much larger number of the old projected surplus – a projection from the beginning of the decade – instead of the current, actual budget deficit. This trick throws off everything, because the impact of what happened in say 2003 is dumped in with the current financial problems as though they had the same value to the current budget. No one actually thinks that. It’s a shell game.
Note that Heritage says the surplus projection was “completely unrealistic,” so if you take them at face value, they really make the argument that the Bush tax cuts were fiscally irresponsible because they assumed a surplus that would and could never happen. It means, bluntly, that the choice to reduce tax revenues at a cost of $1.7T was stupid because it was counted against a budget projection that was “completely unrealistic.”
2. The second myth, that Bush policies aren’t to blame, starts with a single point, that the budget deficit had “stabilized at $161B.” That is their linchpin. What to make of it? Your charts have consistently followed CBO and shown the impact of the tax cuts, etc. Who is right? After all, projections are about an unpredictable future – that Heritage said in the preceding point was “completely unrealistic” a decade ago and thus is likely to that way a decade hence. What about NOW?
You note that interest costs are higher because so much was added to the debt. But the real point is what Heritage themselves say, that the deficit “stabilized” in 2007, the peak of the last business cycle. I don’t know how one could say that a peak represents stability. It’s dishonest. A more accurate description is that budget choices – including tax cuts and wars – generated a very large budget deficit of over $400B a year as the economy was improving and only managed to reduce that deficit to $161B at the very peak of a significant bubble. In other words, you bought their presentation by accepting their words when they are manifestly manipulative and untrue. Your actual argument, which you never state clearly, is that if those policies are continued, then the actual budget history shows they generate budget deficits of over $400B a year, even apart from a massive recession. I think you argue with their methods and ignore the way they twist the words.
3. This myth makes the most sense. Until you reach their charts. They include in the appendix a chart of “Current-Policy Budget Baseline – Percentage of GDP.” They use this as the structure of the entire argument. The chart doesn’t support their argument. They frame the argument in terms of percentages and bluntly say that is the “proper way to diagnose the cause of long-term deficits.” They then cite these averages as proof. But look at the chart. It shows that 2.1% of the problem is tax cut costs and that 3.2% is increased interest on the bigger debt. They talk about the rise in social security but they express that in dollars because their own chart shows the percentage of GDP for all entitlement spending rising by a total of .7% of GDP.
For all the numbers in their piece, they show non-defense spending decreasing as a share of GDP by .8%. That’s not runaway spending. That’s the opposite. It doesn’t take much math to compare an increase of .7% in the GDP share of entitlement spending to a .8% decrease in the GDP share of discretionary spending to see that we end up with a net decrease of .1%.
If you use their actual chart, they argue that cutting out the tax cuts saves 2.1% of GDP by 2020. Not only that, but look at the chart and you see that is the ONLY item which can be so easily summarized. You don’t need to reform social security or medicare or even defense spending to generate – per Heritage’s own chart – an additional 2.1% share of GDP.
This means the real issue is the interest cost. And that means the question is whether there are policies that would raise additional funds that would lower the debt and thus reduce the interest cost while not also reducing revenue. Tax hikes would produce something, but not to the level of 3% of GDP. This then argues for continuing to address health costs – if only because that gets at Medicare and Medicaid – and to tackle social security. But we’d be talking about 3.2% or some other relatively reasonable figure.
In sum, if you take Heritage’s own words, they always hang themselves. Always. Look at the post I made by mistake. They always distort things when they make partisan arguments. It’s important to attack those distortions because otherwise you accept them and then you’re arguing who is right, not who is lying.