Bloomberg News

Obama Channels Eisenhower With Anemic Government Spending Growth

January 22, 2013

Obama Inauguration

U.S. President Barack Obama gives his inauguration address during the public ceremonial inauguration on the West Front of the U.S. Capitol in Washington, on Jan. 21, 2013. Photographer: Brendan Smialowski/AFP via Getty Images

Senate Republican leader Mitch McConnell says it’s time for the president to “get serious about spending.” The budget numbers suggest Barack Obama already has, with beneficial effects on the deficit.

Federal outlays over the past three years grew at their slowest pace since 1953-56, when Dwight D. Eisenhower was president. Expenditures as a share of the economy sank last year to 22.8 percent, their lowest level since 2008, according to Congressional Budget Office data. That’s down from 24.1 percent in 2011 and a 64-year high of 25.2 percent in 2009, when Obama pushed through an $831 billion stimulus package.

“If you strip out the stimulus, discretionary spending over the last few years has been quite modest and is scheduled to go to levels we haven’t experienced in modern times,” Robert Reischauer, a former director of the CBO, said in an interview. “Obama signed on to that,” partly in response to Republican pressure.

The slowdown in government spending has helped bring down the budget deficit, especially when measured against the size of the economy. The shortfall fell to $1.1 trillion, or 7 percent of gross domestic product, in the 2012 fiscal year ended Sept. 30, from $1.3 trillion, or 8.7 percent of GDP in 2011. In fiscal 2009, it was $1.4 trillion, or 10.1 percent of the economy, the highest since World War II.

The deficit probably will fall to $500 billion, or just below 3 percent of GDP, by 2015, as businesses and consumers step up their spending after bringing their own debts down, said Jan Hatzius, chief economist at Goldman Sachs Group Inc. The improving economy will increase tax receipts while lowering government expenditures for benefits including food stamps and unemployment compensation.

Diminishing Concerns

“Concerns about the federal deficit are likely to diminish over the next few years,” the New York-based economist wrote in a Jan. 11 report to clients.

Michael Darda, chief economist at MKM Partners in Stamford, Connecticut, says much the same. He blamed the elevated budget gap on the recession and the slow recovery that followed.

“In the next few years, if growth really picks up, the deficit will simply melt away” to low levels, he told Bloomberg Radio on Jan. 15.

A budget gap of about 3 percent of GDP, such as Hatzius envisions, would be enough to stabilize federal debt as a share of the economy, said Donald Marron, who was acting CBO director in 2006 and who now heads the Urban-Brookings Tax Policy Center in Washington.

Outstanding Debt

Outstanding marketable debt, which excludes bonds held by the Social Security pension fund and other government entities, stood at $11.3 trillion, or 73 percent of GDP, on Sept. 30, 2012, according to the CBO. As a share of the economy, that’s the most since 1950.

Some of the increased debt was run up during the presidency of George W. Bush, as he cut income tax rates and plunged into war in Iraq and Afghanistan. Federal debt rose to 41 percent of GDP in 2008 from 33 percent in 2001, the year Bush took office. The budget was in surplus in the closing years of his predecessor Bill Clinton’s presidency.

House Republican Conference Chairwoman Cathy McMorris Rodgers said U.S. liabilities have surged since as Obama “spent more money than any other president.”

“We need the president to get serious about the out-of- control spending, the record debt that we have accumulated as a country,” the Washington state lawmaker told CNN on Jan. 15.

Obama told reporters on Jan. 14 that the U.S. has made progress “step by step” toward his aim of stabilizing the debt as a proportion of the economy.

Budget Cuts

His administration and Congress have already agreed on about $2.5 trillion in budget cuts over the next decade, he said, including $1.4 trillion in reduced outlays and more than $600 billion in higher taxes on the wealthy.

“We are moving toward our ultimate goal of getting to a $4 trillion reduction,” Obama said.

Spending grew just 0.6 percent from 2009 to 2012, according to data compiled by Bloomberg from government reports.

Outlays have been limited under a series of agreements between Obama and Congress, including a 10-year cap on discretionary spending worked out as part of deal to raise the debt ceiling in 2011, said Michael Linden, director of tax and budget policy at the Center for American Progress in Washington.

Republicans Credited

It is Republicans, not Obama, who deserve credit for whatever restraint on spending that’s been achieved, said Douglas Holtz-Eakin, a former CBO director who is now president of the American Action Forum in Washington.

Holtz-Eakin, who served in the White House under George W. Bush, also voiced skepticism that all of the promised budget savings under the spending caps will be attained. The caps cover outlays on everything from defense and homeland security to education and the national parks.

Reischauer, too, has his doubts about the plan. “The public won’t tolerate” the cuts over the coming decade contemplated under the legislation, he said.

Even if the U.S. succeeds in bringing down its deficit to manageable levels in the next few years, it still faces structural spending pressures in the long-run stemming from the aging of the society, according to both Hatzius and Darda.

“The U.S. has a large long-term budget imbalance,” Hatzius said.

Tidal Waves

It’s that threat that Republican lawmakers accuse Obama of ignoring. The “twin tidal waves” coming at the budget are from increased outlays on the Medicare health program for the elderly and Social Security, Senator John Barrasso, a Republican from Wyoming and chairman of the party’s policy committee, said.

“Until you deal with those and reform those programs and strengthen them for future generations, we’re not going to have solved the problem” of the budget, he told Fox News television on Jan. 16.

The CBO forecast in June that federal spending on the major health care programs and Social Security will climb to almost 16 percent of GDP in 25 years, from 10 percent now, due to an aging population and rising medical costs. Such a percentage increase would be equivalent to about $850 billion in today’s dollars, the non-partisan agency added in a report.

Debt Explosion

Lawmakers focusing on deficit-reduction over the next 10 years overlook the explosion of U.S. debt lurking just beyond that time horizon as the population gets older, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

“The 10-year focus is misleading,” said New York-based Feroli, a former member of the Federal Reserve’s forecasting team. “In the process, they’re missing the bigger picture. You’re not going to get the correct medicine unless you get the correct diagnosis.”

Obama said Jan. 14 he is “open to making modest adjustments to programs like Medicare.” He insisted, though, on a balanced strategy, that couples tax increases with spending cuts, and said he wouldn’t negotiate with Republicans under the threat that they won’t increase the government’s debt ceiling.

McConnell rejected that approach, saying that further tax increases are off the table. “The president and his allies need to get serious about spending,” the Kentucky lawmaker said the same day.

Borrowing Limit

The Treasury reached its statutory borrowing limit on Dec. 31 and is using “extraordinary” measures to pay for the government. Those measures will work only until mid-February to early March, Treasury Secretary Timothy F. Geithner said in a Jan. 14 letter to congressional leaders.

The debt limit has been raised periodically since its creation in 1917 during the presidency of Woodrow Wilson. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents. The U.S. never has defaulted on its obligations.

Investors in U.S. Treasury bonds, who most directly bear the risk of a government default, haven’t shown alarm over the political fight in Washington.

The last time Congress fought over raising the ceiling, Obama signed an increase on Aug. 2, 2011, the day the Treasury Department warned that U.S. borrowing authority would expire. Standard & Poor’s cut the nation’s credit rating.

Still, yields on 10-year U.S. Treasury notes declined to 2.56 percent on Aug. 5 and have continued to drop. The yield fell four basis points, or 0.04 percentage point, to 1.84 percent on Jan. 18, according to Bloomberg Bond Trader pricing.

House Republicans revised their strategy for the coming months’ fiscal debate with Democrats, saying on Jan. 19 they’ll agree to a three-month debt-limit increase without demanding spending cuts as part of the deal.

Debt-Limit Vote

Instead, Republicans will use a planned House vote on a debt-ceiling increase tomorrow to try to force Senate Democrats to adopt a budget to spell out their spending plan.

Darda said politicians are confusing cyclical and structural pressures on the budget.

“If the recovery picks up some steam and sustains itself over the next handful of years, the deficit will fall to more normal levels,” he said.

“The problem is, after about the year 2020, you start to get the interaction between demographics and rising per capita health-care costs, and that does, in a structural way, push deficits back up to unsustainable levels.”

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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