Wednesday, March 22, 2006

Deficit Demagogues

The New York Times seems to have misrepresented the facts in an editorial taking Senate Republicans to task over budget deficits.

Whether this was simply the result of carelessness, or a purposeful misrepresentation is hard to say. Whatever the case, the editorial paints a distorted picture.

Says the Times:

Republicans want voters to believe that the deficit is the result of spending increases alone — not tax cuts. That's false. The swing from a $236 billion budget surplus in 2000 to a $371 billion deficit today is a huge deterioration in the nation's fiscal balance, equal to 5.3 percent of the economy. Of that, fully 62 percent is due to lower tax revenues.

There are two major problems with this analysis.

First, the Times falsely conflates lower tax revenues in FY 2001 with the Bush tax cuts, neglecting the fact that Bush's tax cuts weren't even implemented until calendar year 2002, and also chooses to ignore the fact that other elements having a greater impact on the federal budget's receipts were at play during those two fiscal years.

The period the Times cites includes two budgets under President Clinton (FY 2000 and FY 2001). And as we all know, two major events with financial ramifications occurred in calendar years 2000 and 2001, before the Bush tax cuts were even implemented. One was the bursting of the stock market bubble in 2000 and the other was the 9/11 attack the following year.

In 2000 the stock market bubble burst, which adversely affected the revenue the federal government derived from capital gains taxes. This can be seen in the reduction of the surplus between 2000 and 2001. According to data in the federal budget, the surplus shrank from $236 billion in FY 2000, to $128 billion in FY 2001, or more than $100 billion.

(The scope of the stock market bubble, and its impact on the budget surpluses in the last four years of the Clinton Administration is not to be underestimated. In 1996, the total stock market capitalization in the US was about $4.5 trillion; by 2000, the total stock market capitalization in the US was over $14 trillion. This more than tripling of stock prices in four years was accompanied by growth in earnings of only about 70%. This separation between stock price growth and earnings growth is the definition of a stock market bubble. The $ value of the bubble can be placed in the neighborhood of $5 trillion. If half of those stock gains were realized, about $500 billion in capital gains taxes would have flowed into the US treasury between 1997-2001 -- as a direct result of the stock market bubble and nothing else. This flow does not represent a recurring income stream over time.)

The next year the 9/11 attacks occurred, which cost the economy about $1 trillion.

A large result of these two events was a budget deficit of $158 billion in FY 2002. That represents a two-year swing from surplus to deficit of about $390 billion. The first Bush tax cut went into effect in 2002, with an estimated worth of around $75 billion.

Claiming the 2002 Bush tax cut is responsible for the two-year swing between 2000-2002 is pure hogwash.

Further, after FY 2002 the Times doesn't account for the cost of the Iraq war, which is somewhere around $80-100 billion per year since FY 2003, nor does it account for other defense spending increases. Nor does it account for the across-the-board spending increases in areas like education, Medicare and Medicaid, or homeland security.

(The deficit in FY 2003 was $377 billion; in FY 2004 it was $412 billion; in FY 2005, it was $318 billion.)

How the Times can seriously reconcile these facts with what was written in the editorial is a mystery, known perhaps only to Gail Collins and Paul Krugman.