How do we know this? Justin Fox, the editorial director of the Harvard Business Review, thought it might be fun to actually figure out some counterfactuals. Specifically this counterfactual: what would have happened to the federal deficit absent a financial crisis?
With $2.843 trillion in federal revenue and $3.270 trillion in spending, leaving a deficit of $427 billion. The actual revenue and spending totals for 2010 were $2.162 trillion and $3.456 trillion. So spending was $186 billion higher than if we’d stuck to the trend, and revenue was $681 billion lower. In other words, the giant deficit is mainly the result of the collapse in tax receipts brought on by the recession, not the increase in spending. Nice to know, huh?So the vast majority of the additional deficit - in fact, nearly 80% of it - was caused due to loss of revenue due to the Great Recession, not due to increase in spending. That is the very definition of a revenue problem.
Now, as Mr. Fox also points out, even without the recession, the growth rate of federal spending was outstripping the growth rate of federal revenue. But why is that? Largely because of two factors: The explosive growth in defense spending, much of which actually did not make our nation any more secure, and entitlement spending (Medicare and Social Security). Now, before you get mad at me, I know that social security and Medicare are technically not allowed to contribute to the deficit since they have dedicated funding sources, but those are growing expenses and outstripping their revenue growth even more quickly. In addition, in his study, Mr. Fox counts the revenues and expenses as a whole, inclusive of everything. To that end, too, I will point out that President Obama's health reform has saved a half a trillion in giveaway to private insurers from Medicare, and extended the life of the Medicare trust fund by 12 years.
But going back to the point, as you can see, the largest part of our deficit is resulting from the loss of revenue, not increase in spending. We have a revenue problem. Really, we do.