May 21, 2011 – 1:26 p.m.
Political Economy: A Self-Correcting Budget
By John Cranford, CQ Columnist
Leaving aside whether the barb tossed by Newt Gingrich at President Obama last week was racially tinged, there was a certain truth buried in the former Speaker’s over-the-top political rhetoric.
In saying that “Obama is the most successful food-stamp president in history,” Gingrich was tacitly acknowledging that the government Obama heads — and that Gingrich would like to head — is structured to spend lots of money automatically to help cushion the blows from downdrafts in economic cycles.
If, indeed, Obama has resided in the White House at a time of record food-stamp assistance, that’s only because the recession that began before he was elected proved to be the deepest and longest since World War II. And the safety net that was already in place before he was elected is quite large (which doesn’t address the point that there are disagreements about whether it is too large or too small).
All that leads, inevitably, to an even bigger truth: A large portion of the recent increase in the annual budget deficit — against which fiscal hawks of both parties rail — has been the result of a government operating on autopilot. And most economists would say, at least in principle, that’s a very good thing.
So-called automatic stabilizers are structures built into federal fiscal policy that cause tax receipts to decline and financial support payments to rise during recessions. Notably, for instance, revenue declined as a share of overall economic output by 2.6 percentage points in 2009; the largest comparable drop was in 1946. The effect of these stabilizers is bigger deficits. But without them economic contractions would, without doubt, take a more pronounced toll, and the process of recovery would be delayed if not derailed.
The Congressional Budget Office provided a detailed reminder of this point in a recent report that quantifies the “cost” of automatic stabilizers over time. CBO’s analysis pointedly suggests that the deficit would be considerably smaller both in dollar terms and as a share of gross domestic product if the economy were performing at an optimal level — even if there were no changes in policy.
Specifically, CBO estimated that the $1.4 trillion deficit for fiscal 2009 would have been smaller by roughly $315 billion had the economy been running on all cylinders at the time. Similarly, the deficits for last year and this year each would have been smaller by much more than $300 billion if there had been no recession.
Those estimates don’t take into account that there would have been no expense for the financial bailout, the rescue of Fannie Mae and Freddie Mac or economic stimulus if the economy hadn’t gone off a cliff. All of those actions added greatly to the red ink.
The intent of the analysis wasn’t to show that the government’s response to recession can be expensive — that’s all too obvious. Rather, the point was that some of those costs accumulate without lawmakers lifting a finger. And when the economy recovers, those costs will magically go away — again, without Congress acting.
In fact, CBO’s analysis even shows that the economy performed so well during the boom years of the late 1990s that the automatic stabilizers helped increase the short-lived budget surpluses of that period. What a concept.
What the CBO report does not address is likewise important. It does not attempt to quantify what the effects would be on broad economic growth, or on the lives of Americans, if automatic stabilizers weren’t baked into the cake.
Political Economy: A Self-Correcting Budget
Consider, for instance, that the tax code might be structured in such a way that people would keep paying to the government regardless of whether they were employed. Revenue collections would be higher than under the current system, but people would be hard pressed to pay their bills. Purchases of goods and services — including necessities — would fall even further. And the economy’s contraction might be exacerbated.
Or, those in need might endure greater hardships if jobless benefits, food stamps and other assistance were entirely dependent upon specific decisions of Congress to mitigate economic trouble — rather than being available routinely to those who qualify.
In either case, the budget deficit might be much smaller, but at an extraordinary cost to the economy and to individuals.
None of this is to say that lawmakers can afford to disregard the budgetary effects of rising health costs, an aging population or a tax code that seems increasingly out of whack. Plainly, those are long-term problems that will need to be addressed.
But the possibility that an improving economy could wash away several major contributors to the deficit over the next few years suggests new questions about the urgency of sweeping budgetary changes. For now, it may be enough to say that the automatic stabilizers were a blessing of sorts even if they did exacerbate the deficit. And, as for Gingrich’s point, if it’s valid to blame Obama for an increase in food stamps, it might be just as valid to credit him for the biggest effective tax cut since the end of World War II.