The inherited deficits fallacy | KeithHennessey.com

The inherited deficits fallacy | KeithHennessey.com: "Budget Director Peter Orszag spoke at NYU yesterday, a speech titled “Rescue, Recovery, and Reining in the Deficit.”

I wrote a super-long post yesterday, but it was too much. So today I respond to the headline-inducing element of the speech. Tomorrow I will post a longer point-by-point response to the rest of his speech.

Warning: my tone in this post is a smidge more aggressive than usual. Director Orszag’s speech fired me up.

Here is the part of the Director’s speech that got the most attention:

ORSZAG: So how did we get here?

Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.

The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed. The Medicare prescription drug bill will add about another $700 billion to the deficit – bringing us to about $5 trillion total for the cost of just these two policies.

In addition, roughly $3.5 trillion can be attributed to automatic economic stabilizers.

As the economy enters recession, certain spending programs, such as unemployment insurance and food stamps, automatically increase and revenues tend to decline. Although this helps to ameliorate the economic downturn by stimulating demand, it also leads to higher deficits.

Finally, there is the Recovery Act which accounts for just 10 percent of the entire deficit over the next decade.

All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.

Now, assigning blame never solves a problem, but it is important to understand that we didn’t get where we are merely as a result of bad luck."