The budget tends to be approached primarily when we talk about debt and deficit. And I will cover that in this post, but it’s very important to note that the budget also provides the single best concrete statement of a candidate’s values and priorities.
There is no one single factor responsible for our budget deficit. In 2001, the CBO projected 5.6 trillion in surplus for 2002-20011, but in reality we got a 6.1 trillion deficit. Here are the top causes of that 11.7 trillion dollar swing:
- 27% – a poor economy, weak growth in 2001-2007 including two small recessions and then the recession in 2008.
- 13% – Bush Tax Cuts (the bush tax cuts for the wealthy are 4% on their own)
- 12% – Other tax cuts and means of financing.
- 11% – Higher interest costs on the federal debt
- 10% – Iraq and Afghanistan
- 10% – Increases in Domestic Discretionary Spending
- 6% – Stimulus
- 5% – Other increases in defense spending
- 3% – 2010 Tax Cuts
- 2% – Medicare Prescription Drug Benefit
Having addressed how we got here, we also need to stop and reasonably access how bad it is. There are a lot of big numbers flying around. The two most important are the debt to GDP ratio and the interest rates on 10 year treasury bonds. The debt to GDP ratio measures our ability to pay our debts, and the 10 year treasury bond measures the willingness of investors to give us money.
It’s always dangerous to make analogies between a government and an individual, but to understand why the debt to GDP ratio is the best measure, think about the situation of a doctor straight out of med school. The doctor has a lot of debt, but also a high salary, and so will be able to pay down the debt. Unfortunately, our economy is more like someone who took out a bunch of debt but didn’t invest it well enough to be in a position to pay it back.
Our current debt to GDP ratio is just over 100%. That is very high, but is not by itself unsustainable. The real problem is that we have added to that at an unsustainable rate, going from 65% in 2007, to just over 100% now. It is a ratio, so there are two parts to fixing our debt to GDP ratio, we need to reduce the amount of debt, and grow the GDP. Obviously, this is very tricky to put into practice, and I’ll cover some suggestions for how to do this when I write more generally about economic policy.
The yields on 10 year treasury bonds provide better news. Largely because safe investments are rare in a post 2008 world, investors are lining up to throw money at us. The current rate is around 1.8%, the lowest it has ever been. Accounting for inflation, we are basically borrowing money for free. We borrow 100 dollars in 2012 dollars, and we pay back 100 dollars in 2012 dollars (even though it will be more than 100 in 2022 dollars). The credit downgrade had absolutely no impact on our ability to borrow money as treasury bond yields continued to fall. By contrast, Greece is over 24%. Rates over 7% are usually considered unsustainable. This chart compares U.S. 10 year treasury bonds to other countries.
The final part of the budget deficit picture involves health care. The long term projections of U.S. debt that produce numbers so mindbogglingly large that there’s no good way to understand them are mainly a result of the health care costs in the United States. The Center for Economic and Policy Research has a wonderful interactive chart showing what happens to our long-term deficit is we substitute our health care costs with those of any other country that gets similar results (hint: it disappears).
Part 2 of the voter education piece will look at the budgets proposed by Obama and Romney.