Who Is Really Responsible For the Federal Deficit?

Political Myth: Earmarks / welfare / excessive foreign aid / Obamacare / TARP / the Bush tax cuts / [insert disfavored federal policy here] turned the federal budget surplus of 2000 into the massive federal deficit of 2009 (and beyond).

Reality: The federal government’s ongoing financial problems are caused by a wide variety of factors — some of which are often cited by politicians, and some rarely mentioned.

Explanation

In 2000, the United States government collected over $200 billion more than it spent.  Things looked good.  Yet, by 2009, the $200 billion surplus had turned into a deficit of over $1.4 trillion.  What happened?

Inevitably, who you blame for this reversal of the federal government’s financial fortune will depend largely on where you stand politically.  Democrats will likely blame Republican President George W. Bush and/or the Republicans in Congress, while Republicans are equally likely to blame President Obama and/or the Democrats in Congress.  This article will focus not on who is to blame, but instead on  what is to blame.  There is an adage among troubleshooters of all types:  At some point in the past, it worked.  Then, at some later point, it stopped working.  The problem was most likely caused by something that happened between the time it was working (2000), and the time it stopped working (2009).

Of course, it is well known that the federal government ran deficits in the years preceeding 2009, and continues to run deficits today, but 2009 is being picked because it was the year when the Federal Deficit reached its peak.  Federal deficits before and after 2009 were lower.

Here are the major difference between 2000 and 2009, in terms of the federal government’s income statement:

Defense spending:  $440 billion

In 2000, the federal government spent $358 billion per year on defense.  That number nearly doubled to $794 billion by 2009.

Federal Pensions:  $280 billion

In 2000, the federal government paid out just under $450 billion in pensions.  That number went up to $730 billion by 2009.

Medicare:  $230 billion

In 2000, the federal government spent $197 billion providing medical services to seniors.  By 2009, that number went up to $430 billion.  The increase is likely due to the rising cost of health generally, plus the aging population (meaning, the rising number of seniors the federal government has to provide health care for).  During that same time period, the amount of money the federal government collected for insurance rose only modestly, from $135 billion in 2000 to $190 billion in 2009.

Income tax revenue:  $200 billion

The federal government collected $200 billion more in income taxes in 2009 than in 2000.  Part of that is due to the “Bush Tax Cuts”; part of it is due to the shrinkage of the economy due to the recession.  Notably, in 2008, while the Bush Tax Cuts were in effect, the federal government collected approximately $400 billion more in income taxes than in 2009.

Medicaid:  $164 billion

Likely also due to rising health care costs, Medicaid cost the federal government roughly $164 billion more in 2009 than it did in 2000.

Troubled Asset Relief Program: $153 billion.

Unemployment Benefits:  $100 billion

In 2000 the federal government spent $23 billion on unemployment benefits.  That number went up to nearly $123 billion in 2009.

GSE Preferred Stock Purchase (aka Fannie Mae/Freddie Mac bailout):  $95 billion

Tax Credits (EITC and Child Tax Credit):  $40 billion

When a taxpayer is able to claim an Earned Income Tax Credit or a Child Tax Credit that is larger than their income tax liability (i.e. families with children headed by parents who work but don’t make much money), that represents an expense to the federal government.  In 2000, that expense amounted to just under $27 billion.  It went up to just under $67 billion in 2009.

Together, the above things add up to the difference between the $200 + billion surplus of 2000 and the $1.4 trillion deficit of 2009.  Some of those things are one-time expenditures unique to 2009 (e.g. the bailouts).  Some are due to factors that the federal government does not directly control (e.g. the number of unemployed, the aging of the population, rising health care costs).  And some are due to policy decisions that the government has made (e.g. the larger defense budget).

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