Faiz Shakir, Amanda Terkel, Matt Corley, Benjamin Armbruster, and Zaid Jilani | The Progress Report

This year, the federal deficit will exceed 11 percent of the gross domestic product — higher than at any point in the country’s post-war history. Last month, both the Congressional Budget Office (CBO) and the White House’s Office of Management and Budget (OMB) released revised projections for the country’s long-term budget deficit through 2019. Using a several assumptions, OMB “projected a cumulative $9 trillion deficit between 2010 and 2019, while the CBO pegged the total at $7.1 trillion.” Recognizing that “if left unchecked, these long-term deficits could pose significant challenges” to America’s future, the Center for American Progress and the Center on Budget and Policy Priorities are hosting a conference today that is “designed to lay the intellectual groundwork for efforts that the administration and Congress should undertake — once the economy has fully recovered — to put the nation on a more sustainable fiscal path.” Bringing together experts ranging from Nobel Laureate Paul Krugman to former National Economic Council director Laura Tyson, the conference will examine not only the consequences of the current fiscal trajectory, but also opportunities for savings and options for raising revenue. However, in order to make plans to address the deficit, it is vital to first understand how it came to be.

HOW THE DEFICIT GOT SO LARGE: A common refrain from conservatives in Congress is that President Obama’s spending proposals are “burying our children and grandchildren under a mountain of unsustainable debt,” as House Minority Leader John Boehner (R-OH) put it in a statement after the new deficit projections came out. But the effort to place the lion’s share of the blame for the current deficit on Obama’s policies is misguided. As CAP’s Michael Ettlinger and Michael Linden wrote last month, “the policies of the Bush administration, which included tax cuts during a time of war and a floundering economy, are clearly the primary source of the current deficits.” According to Ettlinger and Linden, who base their analysis on CBO numbers, President Bush’s policies are responsible for 40 percent of the 2009 and 2010 deficits. Without the changes to federal law enacted under Bush, “the current deficit would be only 4.7 percent of gross domestic product this year, instead of the eye-catching 11.2 percent — despite the weak economy and the costly efforts taken to restore it. In 2010, the deficit would be 3.2 percent instead of 9.6 percent.”  The failure of Bush’s economic policies — “fiscal irresponsibility, regulatory indifference, fueling of an asset and credit bubble, a failure to focus on jobs and incomes, and inaction as the economy started slipping” — also contribute significantly to the current fiscal picture because “the weak economy is responsible for 20 percent of the fiscal problems we face in 2009 and 2010.” “President Obama’s policies have also contributed to the federal deficit — but only 16 percent of the projected budget deterioration for 2009 and 2010 are attributable to those policies.” In the long run, “the single biggest budget headache” is programs like Medicare and Medicaid, which Obama is seeking to address with health care reform.

THE RISK OF INACTION: In a paper released today, Ettlinger and Linden make the case for why, when it comes to the federal deficit and debt, it is necessary for progressives to “deal with it.” “There is little dispute that deficits do harm if they are large enough and sustained long enough,” write Ettlinger and Linden. “High levels of government borrowing can reduce domestic investment, lower future incomes, raise interest rates, and spur inflation. These can damage the economy and hurt people who see their wages fail to keep up with rising costs or find the price of borrowing to purchase a home prohibitively expensive.” Additionally, “substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad.” Beyond the potentially negative economic effects of sustained deficits, “the nation’s ability to handle a crisis can be limited by a large level of debt.” “If the nation had entered the current recession with a larger level of existing debt, it would have seriously constrained our ability to respond,” write Ettlinger and Linden. “Since economic growth is key to restoring fiscal health, a failure to respond to the crisis and get the economy growing again would have only exacerbated our fiscal problems.”

WHAT CAN BE DONE: The deficit can’t be brought into line by either spending cuts alone or tax increases alone. Instead, a comprehensive approach is needed. ”President Bush left the country with a wrecked federal balance sheet and progressives have no choice but to deal with it,” says CAP President and CEO John Podesta. “The only way to stabilize the debt-to-GDP ratio and get it going in the right direction is to restrain domestic and defense spending, bend the curve on health care costs, and add new revenues. As progressives we need to debate the policy merits and likelihood of enacting a range of options — including designing a small and more progressive value-added tax, changes to the corporate tax code, and taxing upper income earners beyond reversing the Bush tax cuts.” ”This will clearly require a balanced approach, and it is important that the balance is right so that the solution is not worse than the problem,” write Ettlinger and Linden. Today’s conference is a first step towards finding that balance.