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Budget 36,000

Kevin Hassett, the director of economic policy studies at the American Enterprise Institute, former McCain campaign economic advisor, and co-author of Dow 36,000, has a column waxing indignant that Democrats would say they inherited the budget deficit from the Bush administration.

Hassett argues that the Democrats are to blame for the deficit mess. He makes the case by comparing the budget outlook now to the budget outlook as Democrats were set to take control of Congress:

There is an easy way, therefore, to establish how much of the current budget mess is accurately referred to as an inheritance. Just as Nancy Pelosi was taking over as House Speaker, the Congressional Budget Office made a long-run budget forecast. That forecast established the Democrats’ inheritance.

If we compare the current outlook to that one, then we can identify the impact of Democratic policies, and accurately assess the blame. While doing so, we need to remember that Bush shares in that blame, since he signed into law the bills passed by the Democratic Congress.

Back in January 2007, the CBO thought that spending this year would be about $2.9 trillion. Instead, spending is now looking like it will be about $4 trillion. Sure, you might say, that’s the result of sensible Keynesian stimulus and the costs of the financial bailout. But what happens next is almost as striking.

In 2007, the CBO thought that spending would gradually increase from $2.7 trillion to about $4 trillion in 2017. According to President Barack Obama’s May budget numbers, we now expect to spend $4.7 trillion in 2017, about $800 billion more in that year alone.

A couple problems here. First, when people talk about inheriting the deficit, they usually mean Obama inheriting the deficit from Bush, not the Democratic Congress inheriting the deficit from the GOP Congress. Second, even if we grant Hassett's odd premise that the clock on Democratic rule starts with the last two years of the Bush administration, his numbers are completely wrong.

Jim Horney, director of federal fiscal policy for the Center on Budget and Policy Priorities, noted that Hassett is comparing Obama's budget outlook with a CBO forecast. The correct, apples-to-apples comparison is between theCBO's budget forecast as of January 2007 with the CBO's budget forecast as of now. And that comparison finds that CBO projects we will spend $584 billion more in 2017, not the the $800 billion Hassett says.

But wait! Of that $584 billion, $433 billion represents interest on the debt, mostly from extending the Bush tax cuts, and also from reduced revenue caused by the economic downturn.

Another $42 billion is the cost of postponing cuts in physician reimbursements under Medicare. (Congress is technically supposed to cut physician reimbursements, but every year it cancels out the cuts. Thus it was a budget gimmick, predicting cuts down the road that never materialized. It's one of the gimmicks Obama abandoned.) Another $30 billion is the cost of higher defense spending. I suppose Hassett may think that Democrats are wastefully lavishing money on the Pentagon, but his AEI colleagues probably wouldn't agree.

That leaves about $78-79 billion in new 2017 spending -- which means that Hassett's $800 billion figure is off by more than a factor of ten, which is even worse than his Dow 36,000 prediction.

Hassett finishes his column with this blustery crescendo:

In Washington, it is unacceptable socially to assert that anyone is telling a lie -- unless, of course, he is named Bush. So let’s say it is a pure, flat-out, bald-faced and shameless misstatement to claim that the budget outlook is an inherited problem. The mess is largely attributable to the Democrats’ own policies.

Well, again, over the next decade, Obama's budget would make the budget deficit $900 billion lower than it would be if he maintained current policies. So I don't think the administration is the party that's misleading people here.

--Jonathan Chait