"President Obama Doesn’t Understand the Origins of the Deficit" /Dean Baker

President Obama Doesn’t Understand the Origins of the Deficit
By: Dean Baker Tuesday July 26, 2011 1:20 am

This fact should have been highlighted in the news reporting on President Obama’s speech last night. President Obama asserted:

“For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug
program were simply added to our nation’s credit card.

As a result, the deficit was on track to top $1 trillion the year I took office.”

This is seriously mistaken.

The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not “on track to top $1 trillion.”

This is what is known as a “gaffe” of enormous proportions. It indicates that President Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble. This misunderstanding of the origins of the budget deficit could explain President Obama’s willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid.

http://my.firedoglake.com/deanbaker/2011/07/26/president-obama-doesnt-understand-the-origins-of-the-deficit/

-----------Who is Dean Baker?----------

Dean Baker (b. July 13, 1958) is an American macroeconomist and co-founder of the Center for Economic and Policy Research, with Mark Weisbrot. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan.

Since 1996 Baker has been the author of a weekly online commentary on economic reporting. The Economic Reporting Review was published from 1996 to 2006; subsequently he has continued this commentary on his weblog Beat The Press, which was formerly published at The American Prospect, but is now located at the CEPR website.

Before co-founding the Center for Economic and Policy Research in 1999, Baker was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. "He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD's Trade Union Advisory Council."<5>

From 1996 to 2006 Baker was the author of a weekly online commentary on the New York Times' and Washington Post's economic reporting.<6> From 2006 he continued this commentary on the weblog Beat The Press, where he critiques economic reporting in the leading broadsheets, NPR and other mainstream news sources.


http://en.wikipedia.org/wiki/Dean_Baker

posted already so I'll just link to my response.

Dean Baker (b. July 13, 1958) is an American macroeconomist and co-founder of the Center for Economic and Policy Research, with Mark Weisbrot. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan.

Since 1996 Baker has been the author of a weekly online commentary on economic reporting. The Economic Reporting Review was published from 1996 to 2006; subsequently he has continued this commentary on his weblog Beat The Press, which was formerly published at The American Prospect, but is now located at the CEPR website.

Before co-founding the Center for Economic and Policy Research in 1999, Baker was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. "He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD's Trade Union Advisory Council."<5>

From 1996 to 2006 Baker was the author of a weekly online commentary on the New York Times' and Washington Post's economic reporting.<6> From 2006 he continued this commentary on the weblog Beat The Press, where he critiques economic reporting in the leading broadsheets, NPR and other mainstream news sources.

Financial crisis of 2007–2009

Basing his outlook on house-price data-sets produced by the US government and Yale economist Robert Shiller, Baker was among the first economists to assert that there was a bubble in the US housing market in 2002, well before its peak in late 2005<7> and one of the few economists to predict that the collapse of this bubble must lead to recession, although he did not project the specific behavior of the bubble's movement or its duration before collapse.<8><9> He has been critical of the regulatory framework of the real estate and financial industries, the use of financial instruments like CDOs, and the incompetence and conflicting interests of US politicians or regulators, such as Hank Paulson.<10>

Baker opposed the US government bailout of Wall Street banks on the basis that the only people who stood to lose from their collapse were their shareholders and well-paid CEOs. Regarding any hypothetical, negative effects of not extending the bailout, he has explained, "We know how to keep the financial system operating even as banks go into bankruptcy and receivership,"<11> citing US government action taken during the S&L crisis of the 1980s.<12> He has ridiculed the US elite for favoring it, asking, "How do you make a DC intellectual look less articulate than Sarah Palin being interviewed by Katie Couric? That's easy. You ask them how failure to pass the bailout will give us a Great Depression."<13>
http://en.wikipedia.org/wiki/Dean_Baker

riding the Obamabash bus.

This is not the first time he's left out a few of the finer points in order to trash Obama.

an economic process. So no, that doesn't work. Plus it was four: Iraq, Afghanistan, Pakistan and Yemen.

there is a huge "Y" that is not included in the budget, but will later be paid for with borrowed funds.

And you're right about the war costs. But again, Baker was trying to address the narrative Obama presented.

Testimony

The Risk of Dismissal for Union Organizing and the Need to Modify the Process
July 19, 2011, National Labor Relations Board

Federal Reserve Board Policy and the Price of Oil
May 25, 2011,
Testimony of Dean Baker before the Oversignt & Government Reform Committee

State and Municipal Debt: The Coming Crisis? Part II
March 15, 2011,
Dean Baker's Testimony to the House Oversight and Government Reform Subcommittee on TARP and Financial Resources

No Need to Talk About Taking an Ax to Safety Net for the Poor
December 16, 2010,
Dean Baker's Comments at Brookings Institution Forum


The Benefits of Financial Transactions Taxes
May 17, 2010, Dean Baker's Statement to the Bundestag

New Strategies for Supporting Public and Noncommercial Media
April 30, 2010,
Dean Baker's Statement at the Federal Communications Commission’s Future of Media Workshop

The Successes and Shortcomings of the Homeowner Affordability Modification Program
April 14, 2010, Testimony of Dean Baker before the Subcommittee on Housing and Community Opportunity

Work-Sharing: An Effective Tool Against Chronic Unemployment
March 17, 2010,
Testimony of Dean Baker before the Congressional Black Caucus

The Failures of TARP
November 19, 2009,
Testimony of Dean Baker Before the Congressional Oversight Panel for the Troubled Asset Relief Program

Insolvency of the U.S. Banking System
May 19, 2009,
Testimony of Dean Baker before the Subcommittee on Investigations and Oversight of the Committee on Science and Technology (House of Representatives)

The Foreclosure Crisis and President Obama’s Making Home Affordable Program
March 19, 2009,
Testimony of Dean Baker before the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee

Evaluating TARP and Its Impact on the Broader Economy
March 4, 2009,
Testimony of Dean Baker Before the Financial Institutions Subcommittee of the Financial Services Committee (House of Representatives)

The Impact of the Current Economic Crisis on the Elderly
February 25, 2009,
Testimony of Dean Baker Before the Special Committee on Aging (Senate)

The Problems of the Current System of Retirement Income
February 24, 2009,
Testimony of Dean Baker Before the House Committee on Education and Labor

Policies to Mitigate the Foreclosure Crisis
May 21, 2008,
Testimony of Dean Baker Before the Domestic Policy Subcommittee of the Oversight and Government Reform Committee

The Turmoil in U.S. Credit Markets
April 10, 2008,
Testimony of Dean Baker before the Committee on Banking, Housing and Urban Affairs (Senate)



The Causes of Economic Hardship for the Middle Class
January 31, 2007,
Testimony of Dean Baker before the Ways and Means Committee (House of Representatives)


Protecting and Stengthening Social Security
June 16, 2005,
Testimony of Dean Baker before the Subcommittee on Social Security of the Committee on Ways and Means (House of Representatives)


The Problems Facing Social Security
August 14, 2001,
Comments by Dean Baker to the President's Commission to Strengthen Social Security

http://www.cepr.net/index.php/testimony/

about economics.

I reckoned, though, that he would of necessity soon get up to speed, given the right advisors.

I was wrong. He was not given the right advisors.

The Debt Ceiling is a no brainer. It has been passed the last 70 times. President Obama does understand the importance of the Debt Ceiling it's the Republicans and the MSM and apparantly others that don't.

He wanted a much bigger infusion of money put into the economy and was rejected. Everyone today even Repugs say it wasn't enough.

This is just racist bullshit....Where were you and others whe Junior fucked up a surplus and implemented the very tax cuts to the wealthy that started this downward spiral?

Koko, you omitted the LINK for Baker's blog post: http://www.cepr.net/index.php/blogs/beat-the-press/president-obama-doesnt-understand-the-origins-of-the-deficit .

As usual, Baker is technically correct. but this time his point is strategically misleading as well as obfuscating and confusing of the issues on which the President must educate voters this crusial week.

The Republican-manufactured crisis is about the DEBT CEILING, not the DEFICIT.

The DEBT is the cumulative value of all past yearly DEFICITS and SURPLUSES. Deficits rise and fall rapidly with the state of the economy. The too-low tax rates Dubya put in place in 2001 and 2003 wiped out the SURPLUS the economy was running under Clinton. Clinton was using these surpluses to retire past debt, in preparation for paying back the Social Security Trust Fund with Treasury bond auction proceeds through about 2054 (Add 90 years to the birth year of the youngest Baby Boomers, namely 1964).

Dubya squandered the Clinton surpluses on income tax cuts tilted to the wealthy and on unnecessary "wars". But his wasteful fiscal spree did not actually run into huge DEFICITS until his final year in office.

Baker's blog post omits one crucial fact: The January 8 **2009** CBO deficit projection was over a trillion dollars, in contrast to the year-earlier $198 billion deficit projection Baker cites.

But the relevant figure for Obama is the ***2009*** prediction. Obama was inaugurated 12 days AFTER the trillion-dollar deficit projection, and what the President said last night was absolutely true. Incoming Presidents have relatively little control over the budget year that begins in October of the year before they are inaugurated. Their budget watch effectively begins October 1st of the year they are inaugurated in January.

IMO the point Baker really wanted to make was that Republicans have exploited recession economics to manufacture a fiscal crisis from what happens routinely in every recession: Deficits automatically explode as tax revenues decline with employment and "automatic stabilizers" such as food stamps kick in. But then deficits automatically shrink as the process reverses itself with economic recovery.

But IMO the media and the country are not ready for this keen economic insight, especially when Baker botches its delivery with what appears to be a racially-motivated attack on the President's intelligence. Barack Obama is no Al Sharpton!

exactly what effect W's holding the spending on the wars "off the budget" means in this whole discussion. That is, it adds to the debt but didn't add to calculated deficits......

don't understand where you are coming from with that. But, it's becoming clear that Obama either is listening to only Economists who were responsible for the mess we are in, because Krugman, Stiglitz, Baker and some others are not regulars at the White House.

And, well connected columnists Elizabeth Drew had an article in the New York Review of Books where a senior Democratic Senator said to her that he is now getting his economic policy from the politicians like Plouffe and Daley who are positioning him for 2012. Most of his original economic team has left the administration and Gene Sperling is the only one that seems to appear on the financial shows like CNBC or Bloomberg.

So, I appreciate your comments that you think that Baker could have explained his point somewhat more convincingly, but it's obvious that Obama is weak on economics and history of our growing Bubbles economy and what the Supply Side Economic theory has done to cause what we are going through. And, so he has been taken advantage of by Wall Street and the Banksters and he may even basically believe that "entitlement programs" need to be trimmed and that austerity is what we must go through. The Keynesians disagree.

and am shocked by the tone of Dean's blog post, needlessly undermining the President at a time when progressives should be backing him 100 percent.

Dean Baker has spent a lifetime educating Congress and the public on deficit economics and he's just supposed to STFU when he hears glaring half-truths and misinformation or sees, worse- ongoing bad economic policy-- (which he's been writing about every day of this admin and the Bush admins, btw) because the political leader/politician helping perpetuate it is black?

It took guys like Dean Baker pounding FOREVER- FOREVER! to finally get the message pointed out on the truth about social security and the deficit, so that finally most of the "liberal" blogosphere had enough sense to actually begin seizing on it and pushing back in this unholy cat-food commission "deficit crisis" debate.

It seems that as long as he and other progressive economists didn't hear Obama finally conceding the fact openly until very recently (social security not a deficit driver)that he was willing to push him as much as he did on that point of understanding as well. Obama was finally required to explain why, in the worst economic downturn in decades, he wants to include it in his policy anyway.

You know, Ted Kennedy "didn't understand" what the Chained CPI SS Cola would do exactly, to the elderly poor in 1995, either, when DLCer Democrats and Bill Clinton were thinking it might be a fine idea, but he was asked by Kennedy to go to the Hill and explain it and Kennedy listened and got it back off the table. He was publicly critical of what WH/New Democrats wanted to do and how they wanted to mislead on social security and other economic issues, then, too Had NOTHING to do with the color of Bill Clinton's skin.

He quotes claims that the President's statement that "the deficit was on track to top $1 trillion the year I took office” was "seriously mistaken", citing January 2008 CBO projections of a $198 billion as evidence that the deficit was absolutely not “on track to top $1 trillion” in January 2009.

In fact, in January 2009, BEFORE the President took office, the CBO issued a projection of a $1 trillion deficit.

Now those who want to defend Baker will say that he wasn't saying Obama was wrong about the size of the deficit, but rather about the "source" claiming that it wasn't government spending, but rather the housing bubble-driven economic collapse. But you can't talk about the impact of the housing bubble collapse on the deficit without also talking about the fact that bush cut taxes while keepin up spending which ate up the surplus we once had and put us in the precarious position where the economic collapse could only be dealt with through more deficit spending.

Dean Baker's pushing got Obama to finally admit Social Security doesn't contribute to the deficit. And his deconstruction of chained CPI made it accessible to most Americans while the White House was talking about "strengthening Social Security".

The reason Dean Baker is hated in certain quarters is precisely because he demystifies the process and the weasel words. And I'm still waiting for the president to explain how spending cuts are going to help this recession.

can you deny that Social Security is a driver of future DEBT? We know precisely how much Congress and Treasury must repay the Trust Fund each year over the next four decades to cover $2.7 trillion in FICA squandered by Reagan and the Bushes. SS is a VERY tricky issue. See a summary of my earlier GD thread about "strengthening" Social Security at http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=1570607&mesg_id=1572882
.

IMO, now is exactly the wrong time to tackle this long-term problem, largely because a big part of the best solution to it is uncapping FICA on six-, seven-, ..., eleven-figure earners. President Obama knows this, and is offering to "fix" entitlements only tactically--"making them an offer he expects they'll refuse"

He absolutely does deal with the increased new projection:

"The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse,showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not “on track to top $1 trillion.”

But his point is that according to Obama's own narrative, Obama seems to believe we've carried huge deficits as a matter of course and shows no sign that he understands the consequences of the downturn or the housing bubble, the very crises he is supposed to be prioritizing.

So, Baker didn't make YOUR point, he made a simpler and more fundamental one which went right over your head and which you attributed to racism. That's vile.

Obama was inaugurated was 12 days old and just what the President said last night.

IMO Dean Baker would not make the petty polivy-irrelevant point you seem to be suggesting

Did you actually read my post?

It speaks directly to Obama's understanding of the situation he's dealing with.

Obama cited the tax cuts, the wars, and the Medicare prescription drug benefit. Then he said, "As a result, the deficit was on track to top $1 trillion the year I took office." (emphasis added)

Baker counters that, in January 2008, after all those factors were in place, the projection for 2009 was a deficit of only about $200 billion. A year later, after the crash, the projected deficit was a trillion.

Thus his criticism is of the "As a result" phrase that I highlighted. It was inaccurate of Obama to omit the effects of the crash in detailing what caused the higher deficit. Certainly the factors he mentioned were important, too, and I'm glad that he pointed out the relationship between tax cuts and deficits -- a matter of elementary arithmetic but a point that too many people haven't grasped. Nevertheless, including the crash would have made his statement more accurate. Politically, it would reinforce the point that our current problems arise in large part from the collapse of aggregate demand, which is why spending cuts right now would be very bad.

But first I'd like to quote the very next thing the President said in that speech:



Regarding the deficits not being huge in prior years, if we look at the debt figures for fiscal year 2008, we find:

Date       Debt Held by the Public    Total Public Debt Outstanding
10/01/07    5,057,236,452,359.32        9,062,552,400,356.63
09/30/08    5,808,691,665,403.71       10,024,724,896,912.49

So apparently without huge deficits, the debt went up almost $1 trillion. Perhaps the US government was simply borrowing money that it didn't need. Regardless of what the CBO projections were before the financial collapse, the fact remains that those projections were irrelevant for someone elected well after the collapse began. It is not unreasonable to believe the debt figures would be significantly worse for FY2009 - simply based on how much debt was accumulated in FY2008 and the fairly obvious impact of the economic downturn. YMMV.
 

KoKo found was not the first time Baker made this point, and won't be the last. But IMO it was the most inappropriately worded and toned at the worst possible time.

This is an interesting debate.

2. Current Deficits and Rising Debt Were Caused by the Financial Crisis.

Overwhelmingly, the present deficits are caused by the financial crisis. The financial crisis, the fall in asset (especially housing) values, and withdrawal of bank lending to business and households has meant a sharp decline in economic activity, and therefore a sharp decrease in tax revenues and an increase in automatic payments for unemployment insurance and the like. According to a new IMF staff analysis, fully half of the large increase in budget deficits in major economies around the world is due to collapsing tax revenues, and a further large share to low (often negative) growth in relation to interest payments on existing debt. Less than ten percent is due to increased discretionary public expenditure, as in stimulus packages.

This point is important because it shows that the claim that deficits have resulted from "overspending" is false, both in the United States and abroad.

Galbraith's Scathing Testimony to the Deficit Commission Sham

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x569194

And while we're at it:

"One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt. The entire national experience from 1946 to 1980, when public debt fell from 121 to about 33 percent of GDP and again from 1994 to 2000, proves this. In those years the debt-to-GDP ratio fell mainly because of credit-driven economic growth -- certainly not because of public-sector austerity programs. And this is why the deficits returned, in 1980-2 and in 2000, once the credit markets froze up and the private economy entered recession.

Thus until the private financial sector is fully reformed -- or supplemented by parallel financing institutions as was done in the New Deal -- high deficits and a high public-debt-to-GDP ratio are inevitable. In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near 100 percent -- a normal number in some countries -- and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ratio begin to decline."

his opinion of the quality of economic advice and doctrine Obama was getting for some very long time.

"This would be like appointing the arsonist who burned down the city as the new fire commissioner."

http://www.huffingtonpost.com/dean-baker/summers-at-treasury-what_b_142301.html



---------------------------------------------------------------------------------------
The Economists Who Missed the Housing Bubble Are Coming After Your Social Security
http://tpmcafe.talkingpointsmemo.com/2009/02/13/the_economists_who_missed_the_housing_bubble_are_c/

Baker in the Bush era of oblivion:

2002

from “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?”

While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.

http://rwer.wordpress.com/foresight-and-fait-accompli-two-timelines-for-the-global-financial-collapse/

Utterly, totally, depressingly maddening.

No one in BushCo was listening in 2002.

They still weren't listening in 2006...



http://www.bepress.com/ev/vol3/iss4/art1/

http://en.wikipedia.org/wiki/United_States_housing_bubble


And they aren't listening now.

300 Economists Warn Obama: Grave Danger Ahead
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x560332#top

Statement Authors
Robert Borosage and Roger Hickey, Institute for America's Future
Dean Baker, Center for Economic and Policy Research
Robert Kuttner, The American Prospect and Dēmos