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What would the 2010 deficit have been without the financial crisis?

Ever wonder what the deficit would've been if there'd been no financial crisis, no bailouts, no stimulus and no recession? Justin Fox did. And he did more than just wonder. He ran the numbers:

In my no-financial-crisis, no-bailout, no-recession, no-stimulus scenario, spending kept growing at 6.22% a year, and revenue kept growing at 3.45%. ...

Where would it have left us in fiscal 2010? With $2.843 trillion in federal revenue and $3.270 trillion in spending, leaving a deficit of $427 billion. The actual revenue and spending totals for 2010 were $2.162 trillion and $3.456 trillion. So spending was $186 billion higher than if we'd stuck to the trend, and revenue was $681 billion lower. In other words, the giant deficit is mainly the result of the collapse in tax receipts brought on by the recession, not the increase in spending. Nice to know, huh?

By Ezra Klein  | November 1, 2010; 10:00 AM ET
Categories:  Budget  
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Comments

This is useful information, but facts always get in the way of ideology.

Posted by: AMviennaVA | November 1, 2010 10:17 AM | Report abuse

Only a progressive-liberal can look at a situation that has spending growing twice the rate of revenue, and still blame deficits on the revenue side.

I can only hope your spouse doesn't let you carry the credit cards....

Posted by: dbw1 | November 1, 2010 10:37 AM | Report abuse

To be clear, someone "ran the numbers" for a situation that did not exist: the conclusion is based on the theoretical existence of a specific set of hypothetical conditions which never actually materialized. The same sort of thinking leads to baseless counts of "jobs saved."

Couldn't we likewise compute what the nation's financial status would be if Unicorns ran rampant through what is now Wall Street?

A much more useful discussion of the financial crisis appeared at the NYT (http://www.nytimes.com/2010/10/31/opinion/31smith.html) over the weekend.

Also, WaPo published its report regarding GDP growth (http://www.washingtonpost.com/wp-dyn/content/article/2010/10/29/AR2010102906279.html) over the weekend: according to the report, "The U.S. economy remains stuck in neutral," yet under the Obama/Pelosi agenda "Federal government spending rose at an 8.8 percent annual rate".

Posted by: rmgregory | November 1, 2010 10:41 AM | Report abuse

"In other words, the giant deficit is mainly the result of the collapse in tax receipts brought on by the recession, not the increase in spending."

Do progressives even bother to take math classes in college? Democrats explode spending with nearly a trillion dollars of wasted 'stimulus' that clearly didn't stimulate anything, and they are STILL trying to use smoke and mirrors to blame the revenue side of the equation instead of their irresponsible (and, some would say, immoral) out-of-control spending to have their desires now and make our kids pay for it later.

AMviennaVA is right....progressives don't let facts get in the way of advancing their ideology.

Posted by: dbw1 | November 1, 2010 10:45 AM | Report abuse

rmgregory:

I check in on Ezra's columns occasionally, as they are a good source for progressive-liberal thinking when it comes to economics. As you correctly noted, they deal only in hypotheticals that sound heavenly in a classroom, as historical facts and real-world experience typically run contrary to the ideology they attempt to advance.

But it does make for humorous reading, from an economics point of view. And Ezra always leaves me wondering if progressives can work a simple 6-function calculator.

Posted by: dbw1 | November 1, 2010 10:53 AM | Report abuse

Ezra, if the WaPo gives you a 3.5% raise every year, but your spouse increases your household spending by 6%-8% EVERY SINGLE YEAR by buying crap you don't need on your credit cards, tell me....what is causing your household "deficit"? Your spouse's spending, or your failure to get bigger pay raises to keep up with your spouse's spending?

Obviously it's your fault for not getting bigger raises, right? Welcome to the world of head-scratching progressive-economics....

Posted by: dbw1 | November 1, 2010 11:00 AM | Report abuse

It's a tough counterfactual to run. After all, no bust suggests either no boom or at least a weaker boom.

That said, the 2000-2007 averages aren't appropriate. On the revenue side, you are averaging in a recession and a series of tax cuts when assuming a moderate growth / low unemployment scenario. A bare minimum NGDP growth estimate under that scenario is probably 5% annually. Since tax revenues are pro-cyclical and more volatile than NGDP, that probably means at least 6% annual growth in revenue, not 3.45%.

On the expenditure side, the 6.22% includes several new items such as the wars and Medicare part D. Expeditures only rose 5% from 2005-2007, and even that included the impact from new Medicare spending, as well as Katrina and the surge. Assuming 4.6% unemployment in 2008, 2009 and 2010 and no other special items and 5% NGDP growth, 4% spending growth wouldn't be a bad assumption.

Using those values, I see a 2010 deficit of $10 billion.

By the way, an astute comment on Justin's post:

"Joe loses his job and finds a new one paying half as much and yet continues to sustain and even *increase* his spending.

Is Joe’s job loss the reason for his troubles? Um, yes, compounded by the fact that Joe is a complete idiot for spending like nothing happened."

So revenue fell sharply, but the deficit is entirely the result of spending exceeding revenue, and oh by the way it's important to note that spending grew at a quicker pace since 2007 than the already rapid 2000-2007 pace in the face of collapsing tax revenue.

Posted by: justin84 | November 1, 2010 11:10 AM | Report abuse

This is such an obvious and simple point, I'm not sure why Democrats don't make it more. Obviously unemployment going up and GDP going down leads to a loss of tax revenue that would create a large deficit no matter what. I rarely hear Democrats make this argument, even as an aside, but it's an important point to make. Especially because at the end of the day, when the deficit starts going down again no matter who claims credit for getting it under control, the real hero will be a rebounding economy increasing government revenues, not spending cuts.

Posted by: keatnik | November 1, 2010 11:15 AM | Report abuse

This is such an obvious and simple point, I'm not sure why Democrats don't make it more. Obviously unemployment going up and GDP going down leads to a loss of tax revenue that would create a large deficit no matter what. I rarely hear Democrats make this argument, even as an aside, but it's an important point to make. Especially because at the end of the day, when the deficit starts going down again no matter who claims credit for getting it under control, the real hero will be a rebounding economy increasing government revenues, not spending cuts.

Posted by: keatnik | November 1, 2010 11:15 AM | Report abuse

EK, unlike some of the other posters, I know that you are much too smart to have a spouse at age 26, even though you're not an economist.

Posted by: 54465446 | November 1, 2010 11:26 AM | Report abuse

keatnik:
"...the real hero will be a rebounding economy increasing government revenues, not spending cuts."

So, to solve a problem where government spending increased at twice the rate of revenue, even before the recession, you think the fix will be made up in "volume"?

Did you ever run a lemonade stand as a child?

The fact is, GDP (i.e. 'volume', in your equation) has NEVER increased sustainably at the 6%-8% annual rate that progressive politicians (of both parties) have been exploding government spending. We will, therefore, NEVER solve our deficit issues by claiming...as progressives do...that the 'fixes' are all on the revenue side.

I'm not sure what's so hard to understand about this.....SPENDING is the first and foremost problem in the fast-rising deficits. Sure, faster GDP (and therefore revenue) growth would help, but the economy has never grown fast enough to keep up with the current rate of progressives out-of-control spending.

You can't ignore the spending side and hope to get anywhere with reducing the deficit over the long-term.

Posted by: dbw1 | November 1, 2010 11:27 AM | Report abuse

Thank you GW Albatross, you're failures and the failed economic policies of the republican party will be hanging around the necks of every American for generations.

Posted by: notfooledbydistractions1 | November 1, 2010 11:29 AM | Report abuse

@dbw1 - do you realize the deficit actually decreased by a few hundred billion dollars in fiscal year 2009-2010 compared to 2008-2009? 2009-2010 was the first Obama budget, since budgets go from Sept to Sept. You could look it up. http://www.bloomberg.com/news/2010-09-13/budget-deficit-in-u-s-narrows-13-to-90-5-billion-on-rising-tax-receipts.html

The $1.3T deficit is mostly a result of the $1T+ deficit he inherited when he took office basically a few months before the worst of the economic downturn. TARP will end up making a $60B or so profit for taxpayers.

And the stimulus was about 40% tax cuts. So $1T in stimulus wasn't really spent....$787B was, about $300B of which was tax cuts and another $200+B in emergency aid to states to "save jobs" and pay for other emergency funds - medicare, food stamps, etc.

So unless you think tax cuts and spending both have same net effect the deficit (which they do), lumping stimulus "$1T in failed stimulus" is inaccurate on many levels. The biggest failures of the stimulus was that it was too small and its benefits were oversold by the administration because in January 2009, many economists who had their ears underestimated the depth of the recession and how much stimulus would be needed.

Posted by: jetrain | November 1, 2010 2:24 PM | Report abuse

"But it does make for humorous reading, from an economics point of view."

Where, by "economics", you mean "assuming macroeconomics can be done with Quicken".

Posted by: pseudonymousinnc | November 1, 2010 3:05 PM | Report abuse

jetrain:
"The $1.3T deficit is mostly a result of the $1T+ deficit he inherited when he took office basically a few months before the worst of the economic downturn. TARP will end up making a $60B or so profit for taxpayers."

You say the $1 trillion deficit is a result of the deficit he inherited? Wrong. It's a result of how Obama and Democrats (who, you might recall, were in control of Congress before Obama took office) CHOSE to deal with the economic mess.

Let me illustrate...if you lost your $100k/year job and found a different job that only paid $90k, yet your debt exploded from $50k to $ 250k in one year, would that be a result of your 'lost revenue', or the result of your spouse going on a shopping binge and maxing out credit cards so your family could 'feel better' about your situation?

And to claim credit for deficit reduction this past year just because Democrats were only 2%-3% less reckless than they were the year before is fairly comical. The size of the spending-binge-fueled 'reduced' deficit Democrats created in FY 2010 still dwarfs even the most irresponsible deficit the GOP ever ran up.

And lastly, you boast that TARP will make a profit for taxpayers? Seriously? Would now be a good time to talk about AIG, Fannie/Freddie, and the HUNDREDS of BILLIONS that will never be recovered from those Democrat bail-out initiatives?

Like most Democrats/liberals/progressives, you seem to want to deflect attention from the real sources of the problems we are in. You will fit in real nicely with Ezra :o).

Posted by: dbw1 | November 1, 2010 5:58 PM | Report abuse

"or the result of your spouse going on a shopping binge and maxing out credit cards so your family could 'feel better' about your situation?"

Thanks, dbw1, for proving my point that you think macroeconomics is done with Quicken.

Posted by: pseudonymousinnc | November 1, 2010 6:20 PM | Report abuse

jetrain:
" its benefits were oversold by the administration because in January 2009, many economists who had their ears underestimated the depth of the recession and how much stimulus would be needed."

I keep finding funny comments in jetrain's post.

How in the world could Democrats claim the administration 'underestimated' the depth of the recession? They were telling us since 2008 it was the worst economy since the 1930's!!! They were predicting everyone would be sloughing around in sackcloth if we didn't put Democrats in charge of an economy on the brink of the worst collapse the planet had EVER seen!!!!

A few more numbers for Democrats to trip over. These compare numbers from GW's first full year, to Obama's first full year:
+14% growth in GDP
+33% growth in federal tax REVENUE
+73% growth in federal SPENDING

Ezra, please post another one of those funny graphs that purports to show how the deficit was created by Bush's tax cuts, and make another comical argument about how spending has nothing to do with the exploding deficit.

Posted by: dbw1 | November 1, 2010 6:21 PM | Report abuse

pseudonymousinnc:

And thank you for proving liberal-progressives can't get their heads around simple math!

Posted by: dbw1 | November 1, 2010 6:22 PM | Report abuse

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