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Since August 2007 official estimates of current federal budget deficits have soared from about $100 billion to well over $1 trillion. By one reckoning, about 46 cents of every dollar of federal spending this year will be financed by borrowed money—not tax revenue.
Among the reasons for the growing gap between federal tax revenue and spending are the subprime financial crisis and its attendant bailouts, the recession, Detroit, and the initiatives taken by the Obama administration. As the federal budget deficit has widened, the national debt has soared. The Treasury finances the deficit by offering new securities, driving up the national debt, dollar for dollar with each annual deficit. By the end of calendar 2008, the total national debt had risen to $10.7 trillion, about twice the level eight years earlier. Is this debt surge just a temporary response in an emergency, one that can be ignored? Probably not. It is true that the absolute size of the debt (the $10.7 trillion) matters less to economists than its size relative to the economy. But this latter indicator, the ratio of the debt to output (GDP), has also surged. 
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The chart reveals the steep rise in the debt-to-GDP ratio in recent years, bringing it to levels not seen since the Korean War. By the end of this fiscal year in September, the ratio is expected to reach 84 percent, matching the share back in 1950. The chart also shows that the ratio has jumped by about 20 percentage points, from 64 to 84 percent, just in the last two years, including of course the months since President Obama has taken office. That raises the question, how much of the widening deficit can be attributed to Obama’s new programs? Only about 20 percent, according to New York Times estimates using data from the nonpartisan Congressional Budget Office (June 10, 2009). Of the $1.1 trillion increase in estimates for the deficit since August 2007, 44 percent stems from the recession, 17 percent from bailouts, 21 percent from Bush programs continued by Obama, and 18 percent from such new Obama programs as the stimulus package. But what matters now is what President Obama will do to shrink the deficits. The same question, hypothetically, would have been asked of John McCain, if he were president today: “Wherever it came from, what are you going to do about it?” In short, wherever it came from, it is now President Obama’s deficit. What is he going to do about it, beyond the recession? A key ingredient in the Obama administration’s strategy for deficit reduction is health care spending, specifically for Medicare and Medicaid. Budget Director Peter Orszag (himself formerly the director of the CBO) has said publicly on numerous occasions that this is where huge costs savings can be attained. Much of this optimism about savings in health care spending is based on the findings of the Dartmouth Atlas of Health Care. Over the past two decades, this “atlas” has reported sharp geographical contrasts in health-care spending for Medicare-reimbursed procedures—typically without any corresponding difference in the quality of care. (More on this can be found at www.dartmouthatlas.org.) The Obama administration (especially Orszag) argues that this pattern means the federal government can compel hospitals to use “best practices” (meaning least expensive) for Medicare-reimbursed procedures. Such pressure, combined with competition among hospitals and new programs for preventative care, plus near-universal health insurance, add up to health-care reform as the keystone of the administration’s domestic agenda. But as the President explained in a radio address last Saturday, such measures are intended to pay for the additional costs of health-care reform, meaning first and foremost a campaign for universal health-insurance coverage. Granting the success of all such initiatives for the sake of argument, the package still does not seem to add up to much by way of deficit reduction. Even if we assume the rosy scenario for health-care reform comes true, that leaves the budget deficit looming large right on through the next four years. In short, it will probably take more than cost-savings in health care to get soaring federal deficits under control.
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