Timothy Taylor: The deficit doves

When I find myself surrounded by political hyperpartisans, here's a claim I use to make heads on both sides explode: When it comes to budget deficits, Barack Obama looks like Ronald Reagan all over again. Both Reagan and Obama campaigned for president with tough talk on government spending and budget deficits. Reagan loved to point out in his 1980 campaign that since 1961, the federal budget had been in deficit every year but one. He argued in favor of a constitutional amendment that would require a balanced budget. But as president, Reagan never actually proposed anything close to a balanced budget. Obama also campaigned as tough on government spending. Back in 2006, he voted as a U.S. senator against raising the limit on how much debt the federal government could issue and gave a floor speech arguing that higher government debt involved "reckless fiscal policies," that it "weakens us domestically and internationally" and that it constituted "a sign of leadership failure." Or here's Obama in his Oct. 19, 2008, debate with John McCain: "But there is no doubt that we've been living beyond our means and we're going to have to make some adjustments. Now, what I've done throughout this campaign is to propose a net spending cut. ... What I want to emphasize, though, is that I have been a strong proponent of pay-as-you-go. Every dollar that I've proposed, I've proposed an additional cut so that it matches. ... We need to eliminate a whole host of programs that don't work. And I want to go through the federal budget line by line, page by page. Programs that don't work we should cut."

However, both the Reagan and Obama presidencies inherited severe economic stress. When Reagan took office in January 1981, the economy had just staggered out of a six-month recession and was about to collapse into a 16-month recession in 1981-82. The unemployment rate was headed toward 9.7 percent by 1982. Inflation in 1980 hit 13.5 percent.

When Obama took office in January, the economy had already been in recession for more than a year. The unemployment rate was rising sharply, from 5 percent in April 2008 to 7.6 percent at the time of his inauguration toward an October 2009 level of 10.2 percent.

Larger budget deficits arise automatically during a recession as sour economic times drive down tax revenues and increase the need for government support programs. Policymakers often embrace additional tax cuts and spending increases that seek to stimulate the economy but raise the deficit further. Both Reagan and Obama tossed their thrifty rhetoric aside.

Under Reagan, budget deficits climbed from 1.6 percent of gross domestic product (GDP) in 1979 to 4 percent of GDP in 1982, 6 percent in 1983 and nearly 5 percent of GDP through 1984, 1985 and 1986. The recession had ended back in November 1982, but the budget deficits, once unleashed, went on and on.

Under Obama, the budget deficit for fiscal year 2009 (which ended in September) came in at a remarkable 10 percent of GDP. This is by far the highest budget deficit relative to the size of the economy since 1943-45, during World War II, when the U.S. government ran deficits exceeding 20 percent of GDP.

Like Reagan before him, Obama has not offered any path for reducing the budget deficits in the years to come. The man who campaigned on a "net spending cut" for the federal government and who speechified that raising the debt ceiling represented a "leadership failure" is now headed for a future of higher government spending and outsized deficits for years to come.

Perilous times The enormous U.S. economy can handle short-term deficits. Whether such deficits are wise or unwise is a separate issue. The real problems with budget deficits arise when they are large and continuous, at which point they become a half-hidden brake slowing economic growth and hindering flexibility.

For example, large-scale government borrowing tends to reduce national savings, which in turn holds down investment and growth. Obama's director of the Office of Management and Budget, Peter Orszag, coauthored an academic paper back in 2004 arguing that continuing deficits of 3.5 percent of GDP for a decade would permanently reduce GDP by 1 to 2 percent.

Huge government borrowing makes the U.S. economy more dependent on inflows of foreign investment capital from China and around the world. Yet another measure of costs of large deficits is the interest that must be paid. The procession of large deficits is on track to roughly quadruple federal interest payments, from $177 billion in 2009 to $722 billion in 2019. By 2019, one-seventh of all federal spending will be interest on past borrowing!

Whatever your political priorities -- national health insurance? lower marginal tax rates? education? infrastructure? defense? -- a procession of huge budget deficits squeezes the ability of government to achieve them.

But when it comes to the problems created by chronic budget deficits, Obama is in charge at an especially perilous time. The extra-large baby boom generation born between 1946 and 1964 is just now starting to hit retirement age in force. As these people retire, government spending on Social Security and Medicare will climb substantially. Thus, Obama's expected parade of long-run deficits are happening at a time when the federal budget is already headed for severe stress.

The Reagan budget deficits weren't good for the U.S. economy. The Obama budget deficits may end up being worse.