Monday, July 26, 2010

Uncharted Waters

Those who seek to defend the budgets of President Obama and the Congressional Democrats often argue that the huge outlays that we're seeing now are necessary to save the economy from the damage inflicted during the Bush years. And besides how can conservatives complain about deficits when their sainted Ronald Reagan ran up staggering deficits of his own as the economy recovered from recession in his first term? They'd like us to believe that what President Obama is dealing with now--in terms of spending, unemployment, and even presidential popularity--isn't all that different from what President Reagan did in 1982. And that worked out pretty well in the end, didn't it?

The reality is that what we're seeing now early in the Age of Obama is worlds away from the Age of Reagan. An editorial in today's WSJ explains the fiscal disparities:

Mr. Obama inherited a recession, so let's give him a pass on the budget numbers for 2009. Clearly the deficit would have been large no matter who was President, even if the David Obey-Nancy Pelosi $862 billion stimulus made it larger than it otherwise would have been. What's striking about the latest budget estimates, however, is that the White House is predicting the numbers won't improve much through 2011, the third year of the President's term.

As a share of the economy, the White House now says the deficit in fiscal 2010, which ends on September 30, will be even larger than in 2009: 10%. That's after a full year of economic growth, given that the recovery began last summer. More remarkable still, the deficit will barely fall in fiscal 2011, declining only to 9.2% of GDP in the second year of a recovery that ought to be gaining steam.

To put this in historical context, consider the nearby table that compares deficits as a share of GDP under Presidents Reagan and Obama. The 1981-82 recession was comparable in severity to the one Mr. Obama inherited and reached similar heights of unemployment. The deficits that resulted from that recession were the source of huge political consternation, with Democrats, the press corps and even some senior Reagan aides insisting that only a huge tax increase could save the country from ruin.

Yet as the table shows, the Reagan deficits never reached more than 6% of GDP, and that happened only in 1983, the first year of economic recovery. As the 1980s expansion continued, the deficits fell, especially as the pace of spending slowed in the latter part of Reagan's second term. Few remember now, but when Ross Perot won 19% of the Presidential vote in 1992 running more or less on the single issue of the deficit, the budget hole was only 4.7% of GDP

The Obama deficits are double that, and more than one-third higher than even the Gipper's worst year. What explains this? Part of it is that Democrats are simply spending much more, sending outlays as a share of GDP above 25% for the first time since World War II. The White House now says outlays will be higher in 2011, at 25.1% of GDP, than at the height of the stimulus in 2009 and 2010.

This is an ironic tribute to the degree to which Democrats on Capitol Hill have been increasing spending willy-nilly below the media radar. The 111th Congress is the most spendthrift in a century outside of World Wars I and II.