Sleight-of-Hand on America’s budget problems


Over the last two months, there has been a push by the overspending crowd to say things aren’t so bad financially. This push was launched after the Congressional Budget Office’s (CBO) May 2013 report, which shows sequestration, some economic growth, and the fiscal cliff’s tax increases have somewhat improved America’s deficit scenarios in the short-term.

Tea Party Patriots has already called out a variety of media sources for inaccuracies on this subject. However, more recently, the Center on Budget and Policy Priorities (CBPP) – a liberal think tank – released an analysis touted by Lydia DePillis at The Washington Post Wonk Blog showing the deficit and debt situation for America is much better than it was in 2010.

It is not the goal of this post to contest how CBPP assumes Obamacare will slow the growth of health care, nor how it only examines the publicly held debt of America, excluding debt from Social Security, Medicare, and other intragovernmental programs.

First, DePillis’ clear bias in favor of the CBPP report is found in both her article and the fact that she has a headline stating ““How’s the public debt looking? Not bad!” Regarding the article itself, she pushes the refuted claim that the impact of high national debt on economic growth is questionable instead of reality. Second, CBPP, in fact, examines publicly held debt. This difference is critical, and something a “wonk” writer should know – it’s the difference between $16.7 trillion and $11.9 trillion in federal debt.

More importantly, Social Security Trustee Charles Blahous’ recent analysis for E21 completely refutes the growing optimistic view (which CBPP and DePillis represent) of America’s coming fiscal circumstances. Blahous’ piece examines something totally unique:  how claims that America’s fiscal situation has improved in recent years is mostly a psychological trick.

Blahous’ piece is worth reading in full, but here are the two most salient points:

The above graph shows that we are in much worse fiscal shape now than we thought we would be before the Great Recession hit, though even back then it was understood that our fiscal path was unsustainable. Following are some of the salient details of the comparison:

  1. Our near-term debt situation is now much worse than was foreseen at that time.
  2. Our long-term debt outlook is also worse than was foreseen at that time.
  3. The fiscal picture has grown so much worse that federal debt as a percentage of GDP has already far surpassed levels that the dire projections of late 2007 didn’t foresee happening until more than a decade from now.
  4. By any objective measure, if the fiscal picture was serious in late 2007 and warranted substantial deficit-reduction measures, it is far more serious now and requires more aggressive corrections.

So how can CBPP and DePillis claim things are rosy in the future? Blahous has the answer (emphasis added):

The answer may be rooted in the cognitive phenomenon of “anchoring” well-known in behavioral economics. “Anchoring” is basically a cognitive illusion in which an initial perception distorts our evaluation of subsequent data. An individual who believes he will end a transaction with $10 but comes away with $50 is happy. The same individual, if he previously believed he will end the transaction with $100, will come away unhappy with the same $50. The actual welfare of the individual is the same in both cases, but his subsequent attitude about the transaction is heavily influenced by his prior expectations.

Since December 2007 we’ve had several CBO reports in which the fiscal outlook has grown much darker, but also some recent ones in which it briefly appeared a little bit worse than it now is. This phenomenon can create skewed perceptions of federal finances. The last few years of massive deficit spending have objectively made our fiscal situation much more problematic. But at the same time, they have caused the large deficits we now continue to run to be misperceived by some as a return to reasonable fiscal health.

Rationally, it cannot be the case that our fiscal situation was made better by being made worse. But that is exactly the misperception that our last few years of massive deficit spending have apparently created in some quarters. As policy makers look at our fiscal situation, they need to remain on guard against illusion, recognize an untenable fiscal outlook for what it is and take responsible action to deal with it.

One final point about the CBPP analysis: Towards the beginning, it indicates concerns by fiscal conservatives are overblown by noting much of the last several years’ worth of deficit and debt increases are due to temporary spending increases – several stimulus programs, TARP, etc. Here’s the thing – no fiscal conservative of any repute has said these measures are anything but temporary influxes of spending. The problems the nation faces are related largely to growing social welfare programs, Social Security, Medicare, and interest payments – all of which were structurally flawed before recession-related spending exacerbated things.

For a real measurement of how bad things have gotten since 2007, let’s compare the federal government’s debt to its income. According to the Treasury Department’s online records, the federal debt on October 1, 2007 was $9.06 trillion. As of June 27, 2013, it was $16.74 trillion. Meanwhile, according to the White House Office of Management & Budget, revenues in Fiscal Year 2007 were $2,567,985,000,000. Fiscal Year 2013 is projected to bring in $2,712,045,000,000.

Thus, in 2007, the federal government saw income totaling 28.3% of total debt. As of late last week, 2013’s estimated federal revenue will be 16.2% of total debt – and that’s before the next three months’ worth of debt is added, which means the percentage will be even smaller.

In other words, it used to take less than four times the federal government’s annual income to pay down all of America’s debt. Now, it will take over six times federal revenues.

Our debt has gone up by nearly $8 trillion in the last six years. Federal tax income has barely grown, both in pure numbers and as a percentage of the federal debt. By any objective measure, that’s a problem and the growing long-term problems of social spending and interest payments remain a grave threat to America’s future.