President Obama has presented Congress with a spending request of $3.8 trillion for the next fiscal year in 2011, but with a third of it not paid for with taxes, thus resulting in a $1.3 trillion deficit (a whopping 8.3 percent of GDP).
The small piece of good news is that this deficit is smaller as a portion of the nation’s economic output than this year’s gargantuan 10.6 percent for FY 2010 (that $1.6 trillion deficit is a post-World War II record). Budget deficits of this magnitude have occurred before, but only during cataclysmic wars—the Civil War and World Wars I and II.
Contrary to the rhetoric of congressional Republicans, who are stridently criticizing Obama for his excessive spending, these budget deficits are largely the result of George W. Bush’s new entitlement program (Medicare prescription drug coverage), the usual Republican fake tax cuts (tax cuts without concomitant reductions in government spending), bank and insurance bailouts, and the conduct of two disastrous U.S. occupations of foreign countries. Of course, Obama is far from blameless.
Using the key statistic of deficits as a portion of GDP, when Obama took office during FY 2009, the budget deficit was more than 9 percent of GDP. Obama’s $787 billion stimulus package and bailout of car companies increased an already gaping deficit into the 10.6 percent post-World War II record. The 8.3 percent figure for FY 2001 starts a downward projection but is still much too high. In fact, all budget projections for years out past the current and requested years (in this case, FY 2010 and FY 2011) are usually malarkey, because policy changes are unpredictable in the “out years.”
However, if history is any guide, Obama, a Democrat, over the long term will probably be better on deficits than George W. Bush, a Republican (he couldn’t be much worse). That’s because, according to conservative economist John H. Wood of Wake Forest University, historically, U.S. budget deficits have been closed after a crisis has passed.
Democrat Bill Clinton, with tax increases, cuts in military spending, and robust economic growth, managed to defy predictions for indefinite deficits from the Republican Reagan/Bush Sr. years and turned them into budget surpluses ending with FY 2001, the year he left office. Obama now faces a similar task of cleaning up the fiscal mess from the junior Bush’s eight years.
Obama made his task harder by buying into the flawed Keynesian argument that increased government spending is good for the economy. His stimulus package and car company bailouts just dug the fiscal hole deeper. But now the good news is that he seems to have quit digging and may have turned the corner to smaller deficits as a percentage of GDP. Only time will tell, but the wake-up call of the loss of Ted Kennedy’s Senate seat in liberal Massachusetts (in addition to dramatically lowering the probability that Obama’s stealth budget-busting health care program will be enacted) may cause Obama to become a “deficit-reduction Democrat,” much like his forebear Clinton.
After the Cold War, Clinton cut the defense budget despite the prosecution of many frivolous small wars that were unneeded for U.S. security. So far, Obama continues to increase military spending while freezing only a small part of non-security spending. Nancy Pelosi, the speaker of the House, has prudently said the avoidance of cutting security spending is unacceptable.
And security spending is massive. According to Winslow Wheeler of the Center on Defense Information, the annual U.S. security budget—including spending on the wars, the Defense Department, the Department of Energy nuclear weapons programs, homeland security, veterans compensation, international affairs, non-DoD military retirement payments, and interest on the national debt accounted for by defense programs—is well over $1 trillion per year.
Cuts to such spending should not entail just slashing a few weapon systems—as was done in FY 2010 but not in FY 2011—but need to result from a total reassessment of the non-traditional post-World War II U.S. foreign policy of U.S. militarized interventionism. Such a policy should have been pronounced a failure when it caused the horrendous retaliatory terrorist attacks on 9/11. Instead, the tragedy triggered the initiation of a neoconservative hyper-version of this same foreign policy, the War on Terror (which includes two unneeded and counterproductive occupations of two Muslim countries), which statistics show made the problem of terrorism worse.
The Cold War is long over, and the concomitant rationale (dubious even then) for using an interventionist U.S. foreign policy to attempt to run the world is now obsolete and even dangerous in an era of blowback terrorism. Many empires throughout history have collapsed or withered away because their aspirations were too big for their wallets; the U.S. is in that perilous position now. Therefore, the United States should dramatically retract its defense perimeter, thus cutting the U.S. security budget by half and saving more than $500 billion a year. Of course, doing this will not cut even half the annual $1.3 trillion deficit. But it is a start on throwing dirt back in the cavernous budget hole.
This article first appeared in The Independent Institute and is republished with permission.