Thursday, May 17, 2012

Is federal spending really lower under President Obama?

Yesterday at ThinkProgress, Michael Linden, Director for Tax and Budget Policy at the Center for American Progress Action Fund, had a post entitled CHART: Spending, Taxes, And Deficits Are All Lower Today Than When Obama Took Office. The post was picked up by Derek Thompson at The Atlantic's blog and probably elsewhere. The thing is, the post's headline claim is simply false, and the post itself is misleading.

Here's Linden's entire post:
Federal spending is lower now than it was when President Obama took office. I’ll pause to let you absorb the news.

In January 2009, before President Obama had even taken the oath of office, annual spending was set to total 24.9 percent of gross domestic product. Total spending this year, fiscal year 2012, is expected to top out at 23.4 percent of GDP.

Here’s another interesting fact. Taxes today are lower than they were on inauguration day 2009. Back in January 2009, the CBO projected that total federal tax revenue that year would amount to 16.5 percent of GDP. This year? 15.8 percent.

One last nugget. The deficit this year is going to be lower than what it was on the day President Obama took office. Back then, the CBO said the 2009 deficit would be 8.3 percent of GDP. This year’s deficit is expected to come in at 7.6 percent.

The fact is that Obama inherited a disaster of a federal budget. Eight years prior, when President George W. Bush took the oath of office, there was a $281 billion surplus. By the time Obama was sworn in, he was facing a $1.2 trillion deficit. Inconvenient though it may be for conservatives (especially those who are running for president), the truth is that spending, taxes and the deficit are all lower today than when President Obama took office.
So, first, is spending lower today than when Obama took office?


The President's own Office of Management and Budget reports that federal spending in 2009 was $3.17 trillion and spending in 2012 is projected to be  $3.21 trillion (both figures are in constant 2005 dollars).

Linden's "spending is lower" claim hinges on looking at spending as a proportion of gross domestic product (GDP).

Again, according to OMB, federal spending in 2009 was 25.2% of GDP (a bit above the 24.9% CBO estimate Linden uses) and it will be 24.3% in 2012 (which is also higher than the CBO estimate of 23.4% Linden cites).

Making 2009 the point of comparison, though, is misleading. As you may recall, 2009 was a year of supposedly unusual federal expenditures like TARP and the first wave of President Obama's stimulus spending. All of that is on the books as spending in the base year of Linden's analysis.

Likewise, 2009 was the year that the "Great Recession" really took a bite out of the country's GDP. In 2007, the last pre-recession year, GDP was $13.20 trillion. It dipped to $13.16 trillion in 2008. In 2009, though, it plummeted to $12.70 trillion. By 2010, the economy was growing again, with GDP climbing back to $13.09 trillion. Last year, GDP surpassed its pre-recession level levels, hitting $13.32 trillion. (All of those values are constant 2005 dollars reported by the St. Louis Fed.) Even though the recession started in 2008, the bulk of the decline in the size of the US economy occurred in 2009.

So, Linden's analysis picks a base year with a spending "numerator" substantially inflated by various rescue and recovery efforts (supported or initiated by President Obama) and a "denominator" deflated by the economic downturn. Comparing 2009 to nearly any other year in terms of spending as a proportion of GDP will make the contrasting year look great. Picking 2009 and comparing it only to the present year is a cheap trick.

If we are going to focus on spending as a percentage of GDP, let's look at a real time series and see how the Obama years stack up to the rest of the data.

Federal Spending, Revenues, and Deficits (% GDP) 1981-2012

The figure shows federal spending (red line) and revenue (blue line) as percentages of GDP from 1981 through 2012. The figure also includes the size (%GDP) of the federal deficit or surplus (solid green line) and the deficit reverse coded (i.e. multiplied by negative one) so that higher values indicate larger deficits (dashed green line). Data are from the OMB (Table 1.3) and values for 2102 are estimates.

So, has Obama been the belt-tightening leader the Linden post suggests?


Spending relative to GDP is down slightly since the crisis year of 2009, but it is on the rise again, growing from 24.1% of GDP in 2010 and 2011 to 24.3% this year. More importantly, though, the figure highlight that the pretty massive crisis year spending spike has not really decayed at all.

From 2001, the year George W. Bush became president, through 2008, federal spending averaged 19.6% of GDP. If you include 2009, that figure goes up to 20.3%. Under President Obama, though, from 2010-2012, federal spending has averaged 24.1%. If we put 2009 on his books, the figure goes up to 24.4%. Depending on your political accounting, annual federal spending is up between 3.8% and 4.8% of GDP on average under President Obama than under President Bush.

The same basic pattern holds up in terms of revenues. At the peak of the crisis, 2009, revenues were substantially lower than in any year President Bush was in office. Yet, revenues are nowhere near peak pre-recession levels. In fact, revenues are projected to remain below 16% of GDP in 2012.

This combination of elevated spending and reduced revenue collections has produced the worst run of deficits (relative to GDP) since World War II. Between the start of Eisenhower's first term (1949) and 2008, the federal deficit averaged 1.8% of GDP and never exceeded 6.0% of GDP. From 2001 to 2008, the deficit averaged 2.0% of GDP and topped out at 3.5% of GDP in 2004.

In 2009, the deficit was 10.1% of GDP, more than five times the average for the years that President Bush was in office. Since then (i.e. 2010-2012), the deficit has averaged 8.7% of GDP and will hit an Obama-era low of 8.5% this year.

It is fun to make some partisan hay out of all of this, but the bottom line for me is just how objectively fiscally screwed the country is right now. We have been piling up deficits of essentially $1 trillion a year (eight percent of GDP plus) every year for the last four years with no end in sight. We are basically stuck in a political-fiscal prisoners' dilemma of doom. So long as Democrats will veto any serious reductions in spending and Republicans will veto any serious increases in revenues, then nothing but the horrendous status quo will prevail.

[Updated 3:21PM to correct typos.]

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