Let me be the first to state that I have long considered the national debt to be one of the nation’s most pressing issues. There is very strong evidence that long term growth rates are affected more by national debt levels than just about any other variable. Also I think that massive deficit spending leads to bad governance because it creates an incentive mismatch: in sum the voting populace doesn’t have to weigh consequences of government size because it is kicked towards the future. I am critical of many of Keynes’ ideas for various mathematical and social reasons, but I’ve always thought that the government should try to run surpluses in good times and deficits in the bad, and they should roughly balance out (my actual opinion on this is very complex because of secular trends and whatnot but it’s a good simple goal).
The reason why Bush was so awful fiscally had little to do with the size of his deficits. Sure they were large, but even more importantly, they were that large during an expansionary period. He presided over the creation of a very large “structural deficit” in the truest sense of the term. Instead of running a massive deficit because of a deep downturn [the recession he faced was the weakest post WWII] or because of large strategic objectives that had specific goals [remember Iraq and Afghanistan weren’t even part of the budget] his Administration pushed for a fundamental imbalance between revenues and expenditures when applied to core parts of the government that were not going to change without immense political reassessment. On top of that they passed the Medicare drug bill which I think goes down as the most wasteful piece of spending in contemporary governance by a mile.
It’s from that background that Obama’s budget should be measured, at least realistically. I’ve read that when including the downturn and the costs of the wars, Bush left Obama with around a trillion dollar deficit; this means that his spending increases amount to about $500-$750 billion on top of that. That’s quite a chunk of change, especially because he has yet to unveil explicit benchmarks for decreasing spending. I think that much is needed to repair our infrastructure and move us to a new energy economy, but I’d have preferred him to unveil a public works program or similar national mobilization rhetoric to demonstrate clear cut measurable goals and the temporary nature of the increased spending. I look forward to seeing what the actual budget is like, but it’s clear that the enormity is giving him image problems amongst moderates and conservatives. However, I think that the perception is misplaced that McCain would have done much better; at least if he had followed his campaign promises.
McCain’s tax plan called for reducing revenues by about $400 billion a year. For my simple analysis I’m going to assume that he would stick to that. The primary spending decrease I heard him cite were earmarks, but reducing those would only save about $10 billion a year even if he were successful. Some commenters (like CStanley) have argued that he was looking to change the philosophical and operational approach in Washington and would have used that to further reduce the core programs I referred to above. I can be sympathetic to that viewpoint, but he never detailed how, and I don’t think it’s fair to give him the benefit of the doubt while not giving Obama the benefit of the doubt about his promises to cut the programs at some point in the next ten years. I’d rather just assume that neither is likely to occur as easily as hoped.
So on its face, McCain’s deficit would have run about $1.4 trillion when added on top of Bush’s. Is that what would have actually happened? No, probably not, because I doubt he could have gotten them through an all Democratic Congress, but this is primarily about intentions. That still leaves a $350 billion gap between Obama and McCain, which is nothing to scoff at. Yet wait, $250 billion of that is marked to help prop up the financial system. You can call me cynical but I don’t think there is anyway McCain wouldn’t spend similar amounts to try to “save the economy.” So that is down to a $100 billion gap.
But then I decided to expand this process out a bit more and how the type of spending would affect things. Obama’s tax plan called for $2.7 trillion revenue reduction over 10 years or about $270 billion a year, but his actual budget looks relatively revenue neutral on tax cuts, or at least the summaries I’ve read. OK time out to explain why I’m cheating marginally. As Hilzoy says, the $4 trillion vs $2.7 trillion was assuming that a) Bush’s tax cuts were made permanent and b) that the AMT was fixed. Without it the difference was -$600 billion for McCain to +$700 billion for Obama. Well the reason I’m cheating is that I assumed that McCain would also be for keeping Bush’s tax cuts permanent and fixing the AMT because well, he pretty much said he would. His $400 billion a year in cuts was on top of that. Meanwhile we know Obama isn’t, but somehow his plus +70 billion got wiped out to be roughly neutral. You can quibble with my reasoning but it’s what I thought was most fair to approach this.
The primary reason why the deficit is rising $500 billion — ex. financial system rescue — is due to direct government spending on healthcare, science, infrastructure and the like. Well that has a vastly different effect on government revenues than $400 billion of tax cuts primarily to the upper income brackets. Using the multiplier effect given by Mark Zandi, I’ll say that the total tax cut multiplier averages out to 0.4 and the total government expenditure averages out to 1.4. Taxing at say 30% (I have no idea if this is right but it sounds roughly accurate) for GDP increase and a 15% bonus to McCain assuming that about all of the non-GDP multiplier yields dividends and capital gains, McCain’s $400 billion of tax cuts would give $108 billion in revenue for a first round (I’m not going to calculate out for each time things go out and flow back in) total of $1.292 trillion non-financial system saving deficit. Obama’s $500 billion of government expenditures leads to a $700 billion increase in GDP so that gives revenue of $210 billion for a $1.29 trillion deficit.
I swear I didn’t know that was going to happen.
So what’s the moral of the story? Well other than I like doing pointless accounting based on hypothetical scenarios, it’s that we shouldn’t give the actual details in this post very much credence as being an actual alternate reality. McCain’s budget could have been $800 billion in deficits, or $2 trillion. I don’t know, and neither does anyone else. But what I do think is important is to realize that looking at the professed policy of McCain shows that the Republicans aren’t really any better at being fiscal managers than the Democrats. I mean their Congressmen had equal amounts of pork (and more per person) than Democrats in the omnibus bill.
If you want to be generous, you can say that it comes down to ideological differences. The Democrats think that government investment will be better for the economy and Republicans think tax cuts do because of private enterprise. Personally I think that there are severe problems in healthcare, blah blah that the government will need to spend massive amounts of money over the next 10 years to fix even if things are done right…and I say this as I’m trying to venture out for the first time through entrepreneurship of my own, so I’ll see if that perspective changes.
Cynically one could argue that the Democrats are just wasting a lot of money for pet projects and that little will be done with that increased spending. I am very concerned about that possibility and that’s why I am disappointed there hasn’t been any sort of grand program with vision presented. One could also argue that tax cuts that the wealthy benefit from the most, when measures of wealth inequality are near historical highs, is a very bad idea and that the Republicans (or at least McCain’s policy) would do little good. I’d be one of those people.
Not like this will surprise anyone that reads the site, but our problems are so big that neither side seems able to handle them. I just felt I had to write this post because it seems like people have buyer’s remorse and that McCain may have been better or something; he wouldn’t have, at least not based on his campaign promises.