Who Stands for Fiscal Responsibility?

Last week’s New York Times column by David Leonhardt, asserting that “Democrats are the party of fiscal responsibility,” garnered many comments from those predisposed to agree with him.  Leonhardt , rather than analyze how specific policy choices have contributed substantively to the federal fiscal imbalance, instead offered a sweeping characterization of the supposedly contrasting fiscal behaviors of the two major political parties.  The column’s focus on partisan distinctions over policy choices undercuts its informational value, but beyond that its evaluations of the two parties’ historical fiscal policy behaviors are very wrong.

I know this because I conducted and published a comprehensive study in 2013 identifying and analyzing causes of federal deficit spending.  It is a complex and difficult task, requiring one to know exactly what one is trying to measure, why, and how to go about it in an internally consistent way.  First, I’ll describe some of the considerations necessary to make those determinations, then how historical fiscal behavior appears when examined from various vantage points.  Finally, I will explain some of the ways Leonhardt goes astray.

First, one needs to determine what fiscal behavior to examine.  Among the possibilities:

1. Contributors to the long-term, structural federal fiscal imbalance that has many analysts deeply concerned; or
2. Contributors to components of the federal deficit only in a specific year or set of years.

The choice is reflective of one’s purpose, and the answers are naturally different depending on which view is taken.  An analyst might attempt to inform solutions to coming challenges; a partisan might seek to cast blame for perceived mistakes of the past and present. As I wrote in my 2013 study:

“Under current Congressional Budget Office (CBO) projections, federal deficits and debt will ultimately reach untenable levels. Usefully approaching this problem requires an understanding of the adopted policies that give rise to these concerning projections, and of the extent to which alteration of these policies can improve the fiscal outlook.

Much ongoing discussion, however, concerns the question of which (and whose) policies are responsible for current levels of federal deficits and debt. This discussion often aims to answer the specific questions of ‘How did we get to where we now are, and who is responsible for it?’ Discussions of current deficit levels naturally tend toward blame-laying and away from problem-solving, in part because only the future can be changed, not the past, and in part because current levels of debt, while problematic, are not nearly as intractable as those that would arise as a result of projected deficits.”

My study analyzed the budget from both vantage points described in the above passage – first analyzing the legislative decisions that fostered our structural fiscal imbalance, as well as a separate analysis of contributors to the current-year deficit, which at the time of publication was 2013.

Another key consideration is whether to evaluate policy makers in one of at least two possible ways:

1. By the incremental changes they make to federal fiscal policy, irrespective of whether their policy effects are experienced during their own times in office; or
2. By their absolute fiscal stewardship records during their times in office, irrespective of when, and by whom, the policies affecting the bottom line were first enacted. 

These are both legitimate ways to assign responsibility for federal budget outcomes. 

In support of the first vantage point, it would strike many as reasonable, for example, to assign responsibility for the Affordable Care Act (ACA) to President Obama and the Congress that enacted it, even though most of the spending under the ACA is scheduled to occur during the terms of subsequent presidents. 

On the other hand, there is a limit to how much earlier legislators can be held responsible for the subsequent spending even of programs they enacted.  Lyndon Johnson and his contemporary Congress were responsible for creating Medicare but could not foresee how expensive it would become by the 21^st century.  Thus, there is also a sense in which elected officials are responsible for all federal finances during their terms of office, irrespective of when specific policies were enacted.  In sum, both vantage points are useful; what is important is to be clear and consistent as to what one is measuring, and why.

With these considerations in mind, my study evaluated the contributors to federal budget deficits from three vantage points:

1. Incremental policy decisions contributing to the long-term, structural fiscal gap.
2. Incremental policy decisions contributing to the annual deficit in 2013.
3. Records of absolute fiscal stewardship during one’s time in office.

Legislation affecting the budget is enacted by Congress, typically with the president’s signature.  My study, lacking an obviously better way to do it, assigned 50% responsibility for budget outcomes to the president, 25% to the House majority party, 20% to the Senate majority party, and 5% to the Senate minority party. 

One of the many peculiar aspects of the Leonhardt column is that it leaves Congress entirely out of the calculations, despite Congress’s lead role in enacting fiscal policy.  So, for example, he credits the Democratic Party alone for the substantial fiscal improvements that occurred during the Clinton and Obama administrations after Republicans took control of one or both chambers of Congress.  

My 2013 study found the top five percentage contributions to the long-term fiscal problem, as projected at that time, to be as follows:

LBJ sits at #1 on this table because he was the single individual most responsible for the enormous fiscal policy change of enacting Medicare and Medicaid, today the biggest drivers of projected deficits.   Since the initial creations of those programs, subsequent legislators have more frequently sought to rein in their runaway costs than to further expand them.  One major exception to that trend is Richard Nixon, under whom both Medicare and Medicaid were expanded along with Social Security – the latter to an extent that remains the primary cause of that program’s projected insolvency. 

Both Johnson and Nixon made their substantial contributions to federal structural deficits while working in tandem with a solidly Democratic Congress.  The contributions of other presidents as well as congressional Republicans to the long-term imbalance are small potatoes by comparison.

The picture naturally looks somewhat different when considering a second view, the root causes of the annual deficit in the study’s publication year of 2013.  The policies of the incumbent president (Obama at that time) are inevitably seen as more important when focusing on the current year.  Looking specifically at 2013 also magnifies the importance of then-recent tax changes as well as expansions of so-called welfare programs – as contrasted with Social Security, Medicare and Medicaid, whose fiscal effects grow larger over the long-term future.  The top five contributors to the federal deficit in 2013, as measured by the incremental policy changes that created it:

The third view explored in the 2013 study – grading elected officials by the sizes of fiscal imbalances during their terms of office – naturally shows President Obama in the worst light, because federal deficits were higher during his tenure than at any other point in modern history.  President Clinton came out looking the best by this third view, followed by House and Senate Republicans (at least in 2013 when the study was done).  

So why do things appear so differently in the Leonhardt column?  One reason has already been mentioned; because Leonhardt entirely ignores the fiscal records of the congressional parties.  But even when grading presidents, he uses only one simple and poorly-designed criterion: comparing the deficit as a percentage of potential GDP (excluding “automatic stabilizers”) when a president entered office, to when he left.  President Obama’s administration, for example, appears favorably by this measure.

The metric Leonhardt relies upon generates obviously absurd results.  Beyond erasing Congress from the numbers, it also erases most of the president’s own fiscal record between entering and leaving office.  Framing the question only as a comparison of the president’s first and last years fails to account for whether the deficits in those first and last years were small ones or very large ones.  Only with such a limited view of fiscal behavior can one look positively upon the direction of federal finances during President Obama’s two terms, from 2009 to 2017 -- during which time the federal government accumulated debt at a rate otherwise unseen in modern history (see the accompanying figure). 

The only potential justification for focusing solely on the change in the annual deficit between one year and another would be if one is attempting to measure incremental policy change during the intervening period.  But Leonhardt’s metric does not do that.  Major fiscal policy changes enacted during the Obama administration added substantially to federal deficits (among them the stimulus legislation, the payroll tax cut, tax rate extensions to forestall a deficit-reducing “fiscal cliff,” various income security program expansions, and the Affordable Care Act (ACA)). 

This is not to denigrate President Obama, whose contributions to the structural fiscal imbalance were smaller than those of predecessors Lyndon Johnson and Richard Nixon.  It is to illustrate that one cannot evaluate fiscal behavior solely by whether deficits are going up or down in the short term.  This should be especially obvious when, as in this case, the administration’s policy decisions moved in the opposite direction from the short-term deficit trend.    

The Leonhardt column includes other mistakes of lesser analytical importance.  It repeatedly mentions tax policy while neglecting the far larger fiscal damage caused by entitlement spending growth (except to mention one atypical program expansion under a Republican president).  It also incorrectly claims that the ACA (so-called Obamacare) “cut the deficit on net.”  The ACA was indeed projected to increase taxes by more than it increased spending, at least when compared with Congress’s controversial scorekeeping baseline.  But that is not what happened: instead, various of the ACA’s financing measures were later suspended, repealed, delayed or weakened. 

Last year CBO certified that repealing the ACA would reduce the deficit even if a substantial alternative health entitlement replaced it.  It is fine to note that the ACA’s tax increases were originally designed to offset its spending increases, but it is not correct to say they actually did so.   Even if the ACA’s revenues had come through as projected, enacting a massive new entitlement in the fastest-growing part of the federal budget would hardly be evidence of fiscal responsibility. 

The Leonhardt column drew criticism after its publication.  The Progressive Policy Institute (PPI) then published a defense of the column, but did not address its flaws.  The PPI article instead analyzed something quite different – specifically, whether the two parties have managed annual deficits to respond to short-term changes in the unemployment rate, which PPI presents as optimal policy.  That is a potentially interesting question but it is one of short-term economic policy management. When it comes instead to measuring fiscal responsibility, the question  has far less relevance than whether recent elected officials have supported or resisted tackling the multitrillion-dollar entitlement spending obligations that drive the federal government’s structural fiscal imbalance.

What would we find if we updated the 2013 study for today’s fiscal environment? One would need to redo the study in detail to be sure.  However, it is likely that the contributors to the long-term fiscal imbalance would look mostly the same now as they did five years ago.  As for an analysis of the current-year (2018) deficit, it would likely show a significant contribution by President Trump and the current (Republican) Congress, but again one that pales relative to LBJ’s contributions.

As my 2013 study noted, “It is relatively straightforward to develop a framework that is certain to assign blame for existing deficits to targeted policies or to individuals associated with an opposing political party. All that is required is to adopt a time frame and a method of allocating responsibility that lead inevitably to this result.” Unfortunately, “such polemical constructions may well serve political purposes, but they do not serve the objective of understanding the leading causes of federal deficit spending.”  This shoe fits the Leonhardt column.

The primary causes of current and projected federal deficits are a series of unwitting fiscal decisions made between 1965 and 1972, by presidents Lyndon Johnson and Richard Nixon, both working with a Democratic Congress.  The fact that these deficit-drivers were enacted primarily by Democrats is not important now.  What is important to our future is fixing the problem.  Confusing ourselves about its causes is counterproductive toward that end.

Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.

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