2009 Deficit Is a Triumph of Fiscal Policy

Posted October 19, 2009 at 4:04pm

Despite the headlines and the page-one, right-hand column, above-the-fold stories in the New York Times and Washington Post on Saturday, I’m not at all upset about the 2009 federal budget deficit.

[IMGCAP(1)]You shouldn’t be either.

If anything, the fiscal 2009 deficit, which the Treasury officially reported Friday at $1.4 trillion, should have been even higher given the magnitude of the economic turndown at the start of the year. When you consider the close-to-desperate U.S. economic situation that existed — interest rate reductions that were having little impact, greatly reduced business spending, frightened and tightfisted consumers, huge home loan problems, and limited new credit because of the troubles in the financial sector — the federal budget had to play the major role in sparking the recovery that now seems to be well under way.

In other words, the 2009 deficit should be recognized for what it really is: a triumph of fiscal policy. It deserves to be applauded rather than condemned.

The 2009 budget deficit also wasn’t upsetting to me because it was anything but a surprise. The White House and Congressional Budget Office didn’t sugarcoat the number or use gimmicks to make it look smaller. Instead they both projected back in February that it would reach 13 figures. In fact, for a variety of reasons, the final 2009 deficit was about $400 billion (22 percent) less than the $1.8 trillion projected earlier in the year.

What I am upset about are those who are upset about the 2009 deficit. They fall into two categories.

The first are the deficit hawks. These are the people who talked about the 2009 budget deficit as if it were a tool of the devil that had to be avoided because it was going to lead to economic hell and damnation. You could almost imagine their words used in a sermon from a fire-and-brimstone preacher or in a song from “The Music Man— — like Broadway extravaganza telling us that there was budget trouble in River City with a capital T which rhymes with D which stands for deficit.

The deficit hawks who made statements like that about the 2009 deficit were wrong. This is painful for me to say. Not only do I think of myself as having deficit-hawk tendencies, I am generally considered to be a hawk by others. But I have to say to my hawk colleagues that they did the movement a huge disservice by not considering the economic context in which the 2009 deficit occurred. Given the limited tools available to policymakers to deal with the recession, the record-high deficit was completely justified; the criticism from the hawks was not.

The second are what can best be called the “hawks-come-lately— — the people and groups who expressed dismay about the 2009 budget results even though federal red ink seldom, if ever, bothered them before.

What makes the hawks-come-lately so upsetting is that most of the 2009 deficit is the result of previous spending and taxing policies most of them supported. At the start of the year, the baseline deficit, that is, the deficit that was estimated would occur in 2009 because of the laws already in effect, was $1.2 trillion. The only major legislative change since then was the stimulus. Lower-than-expected revenues because of the economy increased the deficit further.

The hawks-come-lately deserve special condemnation for two reasons. Not only have they complained that the stimulus isn’t being spent fast enough, they also didn’t support reducing the deficit years ago when the time was right because the U.S. economy was growing. They didn’t, for example, insist that the substantial additional spending for activities in Iraq and Afghanistan be offset with spending cuts or revenue increases. They also didn’t demand that the tax cuts or major increases in domestic federal spending (Medicare prescription drugs, for example) enacted during the George W. Bush administration be offset in any way.

Not only did these things increase the deficit then, the permanent or ongoing spending and revenue changes they voted for was a major reason the 2009 deficit was so high. In addition, the government borrowing that resulted from the previous years’ deficits increased federal interest payments in 2009 by billions beyond what they otherwise would have been.

There are two lessons from this year’s budget debate. The first should be that all federal budget deficits are not created equal. A deficit does not automatically indicate that a fiscal policy is incorrect, corrupt or dangerous. A deficit that occurs like many did earlier this decade when the economy is thriving may indeed be the sin the hawks make it out to be. By contrast, a deficit that occurs when fiscal policy is needed to stimulate the economy may well be a very good deed.

The second lesson is that those who criticize a particular budget deficit can’t automatically be assumed to be fiscally responsible. Federal deficits are as much the result of spending and taxing policies put in place years before as they are of anything enacted in the past few months. In fact, as we now know from how long it took and is taking to implement both the Bush and Obama stimulus plans, the current year’s deficit has very little to do with policies that have been enacted recently.

My biggest fear is that neither of the lessons about the 2009 budget deficit will be learned in any meaningful way. Frankly, if that happens, it will really be upsetting.

Stan Collender is a partner at Qorvis Communications and author of “The Guide to the Federal Budget.— His blog is Capital Gains and Games.