January 26, 2004

The Truth Deficit

The press is trumpeting the latest Congressional Budget Office deficit forecast, claiming the U.S. faces a "record" budget deficit this year because of the Bush tax cuts. Only problem: it isn't true. To be a record in the modern era (since 1940) the federal budget deficit for this year would have to top $3.49 trillion.

What the press - and Democrats seeking to unseat Bush - will be discussing in the hours and days ahead is the CBO's projection of a $477 billion deficit for the year, which is, in fact, larger in actual dollars than any previous year's deficit.

But discussing the deficit in simple dollar figures is a poor way of analyzing the data. The honest and useful way to look at debt is to compare it to income - specifically to the national gross domestic product, the measure of the size of the U.S. economy. After all, it is the economy that produces the revenue that funds the budget and pays the debt-service.

The Democrats have an excuse for not presenting a meaningfully accurate analysis of the CBO projection - they're spinning the data to try to wrest the White House from President Bush. But the news media has no excuse. Either they are journalistically lazy - I found the truth via Google in about 20 minutes - or they are deliberately spinning the story to favor the Democrats and make the Bush administration look bad.

Here are the facts: The $375 billion deficit in 2003 was the highest in dollar terms ever, topping the $290 billion in 1992. This year's deficit is projected to hit $477 billion. Now, I'm no fan of deficits. I'd prefer Congress just take the budget and slash $477 billion in spending, and balance that sucker in one year. But it's simply not true that the deficit is, in any meaningful way, a "record."

Here's why: The deficit is smaller than it was in the 1980s as compared to the size of the U.S. economy.

Consider this: If you made $24,000 this year, and spent $34,000 by putting $10,000 on your Visa, your "deficit" would be $10,000 - and would be a rather large problem. But if, say, 10 years later, your income had risen to $100,000 a year, and you spent $120,000, your deficit would be larger in real dollars but smaller as compared to your ability to finance it.

The 1992 deficit equaled 4.7 percent of the nation's gross domestic product, according to historical tables in the White House's official 2004 budget document (see page 25 of this PDF file). That was not a record. During the Reagan era, the largest deficit as a percentage was 6 percent in 6 percent in 1983. That was not a record. In 2002, the deficit was a mere 1.5 percent of GDP.

In the modern era, the largest deficit on record occurred in 1943, during World War 2, when the deficit equaled 30.3 percent of that year's $180.1 billion GDP.

In 1945, the federal debt of $260 billion equaled 117.5% of GDP

You can find historical GDP data on page 182 of the document I linked to above, incidentally, and the federal debt data starting on page 116. It's worth looking it - because, for all the hand-wringing about the federal debt these days, it's clear from the data that the debt is not anywhere close to a record.

In 1992, GDP was $6.218 trillion. That year's deficit was 4.7% of GDP. The accumulated debt of $4.001 trillion was 64.4% of GDP.

In 2002, GDP was $10,336.6 trillion. That year's deficit was 1.5% of GDP. The accumulated debt of $6.198 trillion was 60.0% of GDP.

In 1981, the federal debt stood at 32.5 percent of GDP. It grew to 36.3 percent during the Reagan years - and continued growing right through the first Bush administration and into the Clinton years, reaching 67.3 percent in 1996 before starting to decline. It dropped to 57.6 percent in 2001. It rose in 2002 and the federal debt - though larger in real-dollar terms than ever before in history, stood at 60.0 percent of GDP.

Ironically, the federal debt today is almost as large as the national economy was just 12 years ago. Specifically, the nation's $6.198 trillion debt in 2002 is about the same as the entire size of the national economy in 1992 - $6.218 trillion. But the economy has grown much larged since 1992 - GDP reached $10.33 trillion in 2002. The result- although the debt grew more than 50 percent - it was $4 trillion in 1992 - the debt shrank from 64.4 percent to 60.0 percent of GDP. Sure, the debt is growing. Yes, deficits are in general worse than balanced budgets. But the nation's ability to finance debt - i.e. the economy - is growing, too.

So... back to the question of the 2004 deficit projection. Just how big would the 2004 deficit - projected to be $477 billion - actually have to be in order to be accurately considered a record for the modern era? Well, it would have to be at least 30.3% of GDP.

The Congressional Budget Office's most recent forecast predicts 2004 GDP of $11.629 trillion. The projected $477 billion deficit will amount to 4.1 percent of GDP.

In 1943, the deficit was 30 percent of GDP. If Bush proposes a budget that has a deficit of $3.525 trillion - not likely - you could legitimately claim he is proposing a "record" deficit. Somehow, I don't think he's going to propose a budget with a $3.525 trillion deficit.

Fiscal conservatives are right to dislike rapidly rising federal spending. But it's worth noting that the deficits we are racking up today are partially because of the our need to spend what it takes to win the War on Terror for the long term by spreading freedom and democracy to the Middle East.

We deficit-spent to win World War 2 and the value of that investment is beyond question. We deficit-spent to win the Cold War - and the value of that investment is beyond question.

Years from now, we'll look back and say, yeah, we deficit-spent to defeat Islamofascist terror and bring democracy and real prosperity to the Middle East, and the value of that investment also will be beyond question.