Deficit growth started under Bush

By Tom Maertens
The Mankato Free Press
Sun Oct 24, 2010

Poll after poll shows that many Americans believe the country is in decline. The current economic recession — which really bordered on a depression — has created pessimism about the country’s prospects, which seems to meld into anger about government debt and spending.

This is a remarkable change from even 10 years ago. During the last six years of Bill Clinton’s presidency, according to Politifact.com, unemployment fell from 6.8 percent to 3.9 percent; personal income grew an average of 7.5 percent per year; and industrial production grew by 5.6 percent per year. More than 22 million jobs were created during Clinton’s two terms.

In 1992, Clinton inherited a federal budget deficit of $290 billion, which he turned into a budget surplus his last four years in office, including a $240 billion surplus his final year. When George W. Bush took office in January 2001, the Congressional Budget Office predicted a $5.6 trillion budget surplus for fiscal years 2002 through 2011.

Clinton’s presidency ended with no ongoing war except enforcement of the Iraq no-fly zones.

In short, that was a period of peace and prosperity.

Contrast that situation to what Bush left to Obama. The United States was fighting two wars which were never paid for, and the country lost more than four million jobs in Bush’s last six months. He left Obama a $1.2 trillion deficit because of a tax code that was skewed toward permanent deficits and Bush’s TARP program which added another $700 billion deficit to Obama’s first budget.

Bush apologists like to cite statistics as if Bush’s “term” ended with FY 2008 (Sept. 30, 2008) because it ignores the $700 billion TARP program signed on Oct. 3, 2008, and therefore charged to Obama, (i.e., in FY 2009) and the 750,000 jobs lost every month during Bush’s last quarter in office.

Of course, no president can control everything that happens to the economy. But the president and Congress control fiscal policy. It was Bush’s decision to seek repeated tax cuts while fighting two wars and passing a Medicare entitlement program, all financed with borrowed money, that led to $5.6 trillion in additional debt. Bush’s Medicare prescription drug program alone, according to the CBO, will cost $1.1 trillion over the next 10 years, and add more to the debt than the combined costs of the Bush’s TARP bailout, the Obama Recovery Act and the health care law. Republican Senator Orrin Hatch, made the astonishing but true statement that during Bush’s presidency “it was standard practice not to pay for things.”

As Nobel economist Joe Stiglitz has written, “The fact that we were running large deficits in the period of our boom was unconscionable.” If you run up the deficit in good times, as the Bush administration did, it leaves little room for maneuver in bad times.

But fiscal irresponsibility continues to be a hallmark of today’s Republican Party. They are advocating extending the Bush tax cuts, at the cost of $4 trillion more in red ink, and propose repealing the health care law, which would actually increase the deficit by more than $100 billion over 10 years, according to the CBO. Deficit hawks or deficit peacocks?

There are times when it is necessary to stimulate the economy and other times when the Fed must rein in price growth, using its control over short-term interest rates. But in hard times, both monetary and fiscal policy must be brought to bear. When Obama took office, the country was facing a deflation cycle potentially as serious as the great depression. As Martin Fackler wrote in the New York Times Oct. 16, deflation “makes individuals and businesses less willing to use money, because the rational way to act when prices are falling is to hold onto cash, which gains in value. It becomes a vicious, self-reinforcing cycle: As prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.”

Since the Fed’s discount rate was close to zero, lowering interest rates to stimulate the economy was not possible. The least-bad remaining option was a Keynesian spending and tax-cut program, Obama’s Recovery and Reinvestment Act, to stem the job loss and get more money circulating into the economy. Although many Republican politicians ostensibly favored the Herbert Hoover balanced-budget approach, sure to drive the economy further toward a Japanese-style deflation trap, essentially all mainstream economists recognized what had to be done, despite the bigger deficit it created. The challenge will be to recoup that money when the good times reappear.

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