Alan K. Henderson's Weblog


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Monday, August 06, 2012

Who Built Those Deficits?

We all know the scary debt chart (oops, that's based on the original 2009 projections - this shows the actual deficits up to Fiscal Year 2011, and FY2012 crossed the trillion-dollar threshold.) But what's the story behind the data? In a 2009 article, Cato scholar Daniel J. Mitchell points out that Obama didn't build the 2009 deficit all by himself - and he wasn't even the chief architect:

The 2009 fiscal year began October 1, 2008, nearly four months before Obama took office. The budget for the entire fiscal year was largely set in place while Bush was in the White House. So is we update the chart to show the Bush fiscal years in green, we can see that Obama is partly right in claiming that he inherited a mess (though Obama actually deserves a small share of the blame for Bush’s last deficit since earlier this year he pushed through both an “omnibus” spending bill and the so-called stimulus bill that increased FY2009 spending). The omnibus spending bill totalled $410 billion, and the American Recovery and Reinvestment Act of 2009 was budgeted at $787 billion (revised at $831 billion.) TARP, passed at the end of the Bush presidency, authorized $431 billion in actual disbursements.

Since the sum of those three figures alone exceed the $1.4 trillion deficit, obviously not all of that money (particularly that via ARRA) could have been spent in FY 2009. Presidents don't authorize spending all by themselves. They agree to the spending authorized by Congress, and all spending originates in the House. The House and Senate under Nancy Pelosi and Harry Reid passed these three spending initiatives. (And then-Senator Obama voted for TARP.) Refer to the Historical Federal Receipt and Outlay Summary at the Tax Policy Center's site. FY 2009 saw a $419 billion drop in revenues. That - and TARP and ARRA - are products of the recession.

Who built that recession? Some like to point to deregulation, others like to point to specific regulations (namely the Community Reinvestment Act, which abetted the housing bubble and subsequent burst). In a 2009 article (PDF document), University of Chicago economist John Cochrane takes a somewhat different approach:

The signature event of this financial crisis was the “run,” “panic,” “flight to quality,” or whatever you choose to call it, that started in late September of 2008 and receded over the winter. Short-term credit dried up, including the normally straightforward repurchase agreement, inter-bank lending, and commercial papermarkets. If that panic had not occurred, it is likely that any economic contraction following the housing bust would have been no worse than the mild 2001 recession that followed the dot-com bust.
The reasons for the current recession are pretty straightforward: it is hard to getmuch done if you are scrambling for cash and the normal way of doing business just fell apart.
Two major causes of the panic were the Lehman failure (which signaled to financial institutions that bailouts could not be taken for granted) and the scaremongering rhetoric behind the push for TARP. Key to the financial meltdown were mortgage-backed securities, which attempted the contradiction of low-risk securities (MBS's) backed by high-risk assets (risky mortgages). These securities magnified the effects that mortgage failures could create on their own.

The recession continues for the same reason that businesses avoid mugger-prone areas: an intensely business-hostile government. Businesses aren't hiring as long as the government is seeking to take more and more of its stuff. The deficits continue because of the revenues lost by Obama/Reid predatory policies, and because spending remains abnormally high.

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