Who Deserves Credit for Reducing the Federal Deficit?


Hey, looky here! Steve Benen highlights the chart on the right, which shows that President Obama is making steady progress reducing the massive federal deficit that was rung up in FY2009 by George Bush and the Republican Party. Nice work, Obama!

But wait. Does this seem a wee bit unfair? Fine. You’re right. Bush wasn’t responsible for the deficit. The Great Recession was responsible for the deficit. Nor is Obama (or Boehner or McConnell or anyone else) responsible for the reduction in the deficit. That happened because the economy started to recover. That’s it. That’s the whole story. Deficits always go up during recessions and they always go down after recessions end. Tax and spending policy makes a difference, but not much of one. Taxes and spending almost always go down during recessions, and they almost always go back up during recoveries.

However, with the deficit now around 3 percent of GDP, we’re back in fairly normal territory, which means that tax and spending policy does make a difference. (Until the next recession, anyway.) However, there’s an iron law that everyone should remember but nobody ever does. Here it is:

  • If we drive the deficit down to zero, then private savings have to equal our trade balance.

In other words, if we run a trade deficit, then we’ll have negative private savings. If we want positive private savings (and we do), then we either have to run a trade surplus or else we have to offset private savings with a big budget deficit. There is no way around this. It’s an accounting identity. So whenever you hear someone yakking away about the horrors of the federal deficit, ask them what they want in its place. There’s no hedging on this. You either want a trade surplus (no more living beyond our means!) or negative private savings (bad for growth). It’s one or the other, whether you like it or not.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily bluster—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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