The Fiscal Facts of Life: Do Americans Understand Where Budget Deficits Come From?

by Larry Bartels on August 11, 2012 · 13 comments

in Campaigns and elections,Political Economy,Public opinion

Mitt Romney’s choice of Paul Ryan as his running mate puts fiscal policy—government spending, taxes, and debt—squarely in the center of this year’s presidential campaign. The latest YouGov survey suggests that expectations about future budget deficits under President Obama or President Romney were having a major impact on prospective voters’ choices even before Ryan joined the Republican ticket—and advantaging Romney. But those expectations seem to reflect a good deal of confusion, misconnection, and wishful thinking.

Ryan has spent much of his career warning America of “a crushing burden of debt” that “will soon eclipse our economy and grow to catastrophic levels in the years ahead.” Whichever candidate wins in November will have to wrestle with the long- term federal budget deficit, a “debt bomb” that budget analysts attribute primarily to the escalating cost of health care and the aging of the Baby Boom generation. Paradoxically, he will also face a looming “fiscal cliff” on January 1st, when the expiration of the Bush tax cuts and the Obama payroll tax cut and the imposition of automatic spending cuts mandated by the 2011 debt ceiling deal threaten to wreck economic havoc by abruptly reducing the rate of deficit spending.

YouGov asked 1000 prospective voters “how the outcome of this fall’s presidential election will affect America over the next four years. Regardless of which candidate you personally support, what effect do you think the election outcome will have on the federal budget deficit?” The response options were “much higher if Obama is reelected” (selected by 35% of the sample), “somewhat higher if Obama is reelected” (11%), “no difference” (36%), “somewhat higher if Romney is elected” (5%), and “much higher if Romney is elected” (12%).

The distribution of responses to this question is a testament to the political effectiveness of Republicans like Ryan and Tea Party activists, who have been loudly bewailing the escalation of the federal debt since Barack Obama became president. Democrats’ counterargument that recent outsized budget deficits reflect fallout from the 2008 Wall Street meltdown, the Bush tax cuts, and the Iraq War seems to have been much less persuasive. Nor have they made much headway, at least so far, in convincing the public that the Republican budget plan authored by Ryan and endorsed by Romney would actually exacerbate the deficit by slashing the taxes of top income earners.

Despite the question wording encouraging respondents to put aside their own candidate preferences, expectations regarding future budget deficits are strongly skewed by partisan predispositions (as measured in a “baseline” survey of the same respondents in late 2011). Most Democrats think deficits will be larger if Romney is elected, while most Republicans (and independents) expect bigger deficits under Obama. As is often the case with politically charged beliefs, this partisan gap is especially large among people who are especially knowledgeable about politics.

While expectations about future budget deficits are partly just a reflection of partisan predispositions, they do appear to be having a substantial independent influence on prospective voters’ thinking about which candidate to support. For example, among “pure” independents, those who expected the deficit to be “somewhat higher if Obama is reelected” were 28 points more likely to say they would vote for Romney than those who expected the deficit to be “somewhat higher if Romney is elected”—even after statistically controlling for perceptions of the national economy and whether the country is on the right or wrong track, expectations regarding overall economic growth under President Obama or President Romney, personally liking or disliking each candidate, political ideology, and views about gay marriage.

Mathematically, the federal budget deficit is simply the gap between federal spending and tax revenues. Thus, if either candidate would preside over more spending and less taxing, there is no logical way to escape the implication that the budget deficit would be higher than under his opponent. While the YouGov survey did not confront respondents with this fiscal logic in pure form, it did include a series of questions about how they thought the election outcome would affect (1) “federal spending on Medicare and Social Security,” (2) “federal spending on domestic programs like education, food stamps, and highways,” (3) “defense spending,” and (4) “your own federal taxes.”

Of the 1000 respondents in the survey, 93 provided answers to these questions indicating that spending would be higher and that their own taxes would be lower if Barack Obama is reelected; but only 15% of those people drew the conclusion that the federal budget deficit would be higher under Obama, while 55% said it would be higher under Romney. Conversely, 49 respondents indicated that spending would be higher and that their own taxes would be lower if Romney won in November; but only 3% of them inferred that the deficit would be higher under Romney, while 94% said it would be higher under Obama!

Of course, it is possible to explain away these apparent contradictions by supposing that respondents expect other people’s taxes to be affected much differently than their own by the election outcome. For example, middle-class and poor people who expect higher spending and lower taxes under Obama may suppose that wealthy people’s taxes will go up enough to erase the resulting budget deficit. However, as a practical matter that seems quite unlikely to happen—and in any case, there is rather little evidence in the survey that respondents’ own economic circumstances had much effect on their expectations about future taxes. The most plausible explanation of these beliefs is simply that people are strongly inclined to think that the candidate they prefer is more likely than his opponent to deliver all good things, including government services, low taxes, rainbows, ponies, and a balanced budget.

Is the magical fiscal thinking displayed by these 142 people—14% of the YouGov sample—atypical? Not really. In order to examine the broader public’s thinking about budget deficits, I analyzed the statistical connection between all respondents’ expectations about the budget deficit on one hand and their expectations about government spending, taxes, and economic growth on the other hand. (All of these expectations were elicited as part of the same battery of questions about “how the outcome of this fall’s presidential election will affect America over the next four years.” All are similarly coded to range from −1 to +1, with 0 representing “no difference” between Obama and Romney.)

The accompanying figure shows parameter estimates from separate regression analyses of deficit expectations for survey respondents with below-average levels of political information and those with above-average levels of political information. (The standard errors of these parameter estimates range from .02 to .04; thus, all of the estimates except those for domestic spending are “statistically significant” by conventional standards.)

The three questions tapping expectations about federal spending were all positively related to expectations about the deficit; but the relationship was modest for expected spending on defense and entitlement programs and even more modest for expected spending on domestic programs. Wherever budget deficits come from, in the public mind, they do not seem to come primarily from higher levels of government spending.

The strongest relationship, by far, was between people’s expectations about the budget deficit and their expectations about their own taxes. However, the direction of this relationship was precisely the opposite of what straightforward fiscal logic would suggest: people who expected higher taxes under Obama also expected a bigger budget deficit under Obama, other things being equal, while those who expected higher taxes under Romney also expected a bigger budget deficit under Romney. This peculiar association was strongest among people who were relatively uninformed about politics; but it was easily the most important single determinant of deficit expectations even among people with above-average levels of political information.

Expectations about the federal deficit were somewhat less strongly related to expectations about overall economic growth. People who thought the economy would grow more robustly under Obama thought the deficit would be larger under Romney, and vice versa. (Not surprisingly, expectations about relative economic growth were themselves strongly skewed by partisan loyalties; 47% of Democrats and 66% of Republicans expected higher growth under their party’s candidate, while only 11% of each group expected higher growth under the other party’s candidate.) People’s partisan attachments also had a substantial direct effect on their expectations about the deficit, even after taking statistical account of all these other factors.

The intercept in the regression analysis points to one final anomaly in the public’s deficit expectations. Given the way the explanatory variables in the analysis are measured, the intercept represents the expected response to the deficit question among people who provided neutral responses to all of the other questions—“pure” independents who expected economic growth, domestic spending, defense spending, entitlement spending, and their own taxes to be the same regardless of who wins in November. It is hard to see why people with this configuration of views would expect a bigger budget deficit under President Obama than under President Romney (or vice versa). Nevertheless, they did—and this difference alone depressed Obama’s expected vote by about two percentage points.

Why would prospective voters expect a bigger budget deficit under Obama than under Romney, even with identical levels of economic growth, government spending, and taxes? Perhaps they think the stork will bring it.

 

[Cross-posted at Model Politics.]

{ 13 comments }

RobC August 11, 2012 at 3:04 pm

You write, “[I]f either candidate would preside over more spending and less taxing, there is no logical way to escape the implication that the budget deficit would be higher than under his opponent. ” The context seems to be clear that you mean “more taxing” to mean higher rates or fewer deductions, not simply higher tax revenues because the national income being taxed has grown.

It is, however, not illogical for a voter to believe that the policies or stewardship of one candidate or party may lead to greater growth in the economy than the policies or stewardship of the other candidate or party. You address this somewhat obliquely in the third from last paragraph of your post, but you don’t consider the implications of that belief as providing a logical basis for what you deride as magical thinking.

Those who feel their candidate can help the country grow its way to reduced deficits may turn out to be mistaken, but it seems unduly dismissive not to acknowledge that such a view is not only logical but may be more sophisticated than the static model that seems to underlie your own analysis.

Larry Bartels August 11, 2012 at 3:49 pm

The reason for including economic growth expectations in the analysis was precisely to test the extent to which they underpin expectations about the deficit under Romney or Obama. The effect is there, but it is not nearly as large as the perverse positive correlation between expected taxes and expected deficits. (For the sample as a whole, the simple bivariate correlations are .48 and .78, respectively.) And insofar as there is a correlation, it, too, is subject to the rainbows and ponies interpretation.
The survey module was designed to include a question about “total federal tax revenues,” which would have provided a tighter test of the logical connection between taxes, spending, and deficits; but it got dropped along the way. For what it is worth, I’d be quite surprised if people’s expectations about “total federal tax revenues” under Obama versus Romney were not strongly correlated with their expectations about their own federal taxes.

Jo August 12, 2012 at 2:56 am

You’ve not really responded to RobC there, I don’t think. Higher taxes and lower spending (aka austerity) when unemployment is high and interest rates are low is self-defeating precisely because it tends to raise rather than lower deficits. This is because these policies starve the economy of demand and so tax revenues fall whilst spending on automatic stabilisers (welfare payments including medicare/aid) increases. This is precisely what has happened in the UK and the weaker economies in the Eurozone.

Some of your respondents will know this and answer accordingly. Others will not. You need a much more sophisticated analysis to tease out what is happening here. And you shouldn’t dismiss these people for expecting “rainbows and ponies”. These ideas have a long and distinguished economic pedigree from Keynes through to Krugman and have been empirically vindicated time and time again since the 1930s (see http://falseeconomy.org.uk/cure/what-do-the-experts-say).

bambi October 22, 2012 at 1:35 am

Since there is nothing backing the dollar the act of spending by the government merely involves electronically crediting bank accounts with dollars (or debiting them, when it collects taxes) and there is no limit to the degree that it can do this. All dollars in the world today, whether they be held by individuals, firms or foreigners (and even foreign nations) are created when the government spends and that is the ONLY way that dollars can come into existence. Furthermore, in order for the non-government (you, me, businesses, rest of the world, etc) to have dollars in our pocket or bank account the government has to spend more than it taxes. If it did the opposite—tax more than it spent—then all dollars in the world would soon disappear.

The $16 trillion national “debt” is not really a debt, but merely the sum total of all dollars spent minus all taxes collected over the past 234 years. In other words, $16 trillion of net dollars have been created in the past 234 years and they are floating around out there in the global economy. There are all kinds of reasons that the government spends, but the main reason is that people, firms and foreign nations desire to hold dollars so they end up selling their goods and services and labor to the government in order to accumulate and “have” dollars. THIS IS REALLY WHAT CREATES DEFICITS, not some arbitrary decision by the government to spend such and such, but rather, the desire by people to “NET SAVE” in the government’s unit of account, namely, the dollar.

While the $16 trillion may be a debt or liability to the government, it is not a liability it can never meet because it is denominated in its own currency.

denim August 12, 2012 at 10:41 am

We pay attention. From Bloomberg:
“Five out of six Democrats reduced the national debt as a percentage of GDP, while four out of six Republicans raised it. The story is similar on budget deficits, with five of the top six performances recorded by Democrats and four of the bottom five recorded by Republicans.”
http://www.bloomberg.com/news/2012-06-25/democratic-presidents-are-better-for-the-economy.html

One might ask why focusing on the vision of the 99%, as do Democratic Presidents, is better overall for the economy than focusing upon the vision of the 1%, as do Republican Presidents.

Econ August 12, 2012 at 10:50 am

Since the inhabitants of the Monkey Cage aka Amuricans by and large are irrational in government deficits and debt FACTS, I expect that rational and informed thought will not prevail in the Nov election. Hell, 8 years of Bush II deficts and debt increases did not meet with anger and with a mere shrug leave it to the successor to take care of it. How stupid are Amuricans!!

Mike Sances August 12, 2012 at 11:05 am

Is it possible that people first expect higher deficits, and as a result, they expect taxes will have to be raised to pay them down? Would that explain the relationship between deficit expectations and tax expectations we see here, or is that accounted for somehow?

bambi October 22, 2012 at 1:14 am

Deficits don’t have to be”paid down.” It is the ultimate free lunch in a nation that is Monetarily Sovereign.Contrary to popular “wisdom”, deficits DO NOT cause inflation, inflation is mostly an effect of rising oil prices. Total lack of understanding of sovereign debt and federal deficits by average Americans will destroy the middle class. The war against the middle class by the 1% starts with politicians and the media (fully owned by the 1%) convincing you that the federal deficit is “bad”, a burden on your children or grandchildren, that it will “bankrupt” us, etc. ALL LIES!! Until the 99% understands the need for federal deficits, the 1% will rule. Wise up, in an economy sputtering along at 80% of capacity, GDP will decline (it is declining presently simply due to an increasing domestic population & with any sort of tax increase or spending cut-let alone multiple tax increases or spending cuts, GDP will fall and fall hard, sinking us further back into recession or even depression.

TWO key equations in economics
1. federal deficits=private savings
2. GDP=federal spending+private spending-net imports.

The federal govt. is NOT
dependent on borrowing to make payment.

The US Congress spends by instructing the Fed to credit someone’s member bank account at the Fed. This process is operationally independent from taxing and/or borrowing. It is not dependent on revenues of any sort.

For instance, all Social Security payments are a matter of the Fed entering data on its computer.

That is, all Federal spending can be said to be ‘printing money’.

And Federal taxing can be said to be ‘unprinting money’.

Also, Federal borrowing is nothing more than the shifting of dollars from reserve accounts at the Fed to securities accounts at the Fed.

And paying down the Federal debt is nothing more than the shifting of dollars from securities accounts at the Fed to reserve accounts at the Fed.

REMEMBER: FEDERAL FINANCES ARE COMPLETELY DIFFERENT than yours, mine, businesses, state or local governments or most countries of the European Union.

Larry Bartels August 12, 2012 at 5:14 pm

Jo: If people are just being good Keynesians, shouldn’t their expectations about the deficit be driven primarily by their expectations about economic growth? That’s simply not the case. And if they are so convinced that higher taxes (“aka austerity”) will lead to bigger deficits, shouldn’t they also think that lower spending (“aka austerity”) will also lead to bigger deficits? That’s not the case, either.

denim: I hadn’t heard of Richard Carroll’s book–and the Amazon sales ranking suggests that most of the survey respondents probably hadn’t, either. While I certainly wish him well with it, I’ll just note that my own published pronouncements on the subject of partisan politics and economic performance don’t seem to have made much of a dent in the public’s expectations about economic growth (34-27 higher under Romney) or unemployment (another question in the YouGov survey, 38-22 lower under Romney).

Econ: Not “stupid,” in my view, so much as distracted by other concerns. And questions about how policies matter are genuinely hard, because relevant evidence is almost always sufficiently ambiguous to accommodate varying ideological interpretations.

Mike: A cycle of policy change, resulting higher deficits, political pressure for fiscal reform, and resulting higher taxes seems like a lot to fit in to the four-year window stipulated in the survey (though the first Reagan administration probably came close). But even if that is what people had in mind, why would their responses focus on deficits in Year 2 and taxes in Year 4 rather than on taxes in Year 2 and deficits in Year 4 (which would presumably, in your scenario, display the opposite pattern)–or simply on overall differences “over the next four years,” as the question seems to suggest?

More generally: I don’t think it is possible to rule out every conceivable “rational” reconstruction of this (or practically any other) observed pattern of opinion. But when the rationalization requires a lot of additional moving parts, special assumptions about how respondents are interpreting the questions, or selective attention to some aspects of the evidence at the expense of others, it seems to me to represent an expression of faith more than a plausible explanation.

Jo August 21, 2012 at 1:08 pm

“Jo: If people are just being good Keynesians, shouldn’t their expectations about the deficit be driven primarily by their expectations about economic growth? That’s simply not the case. And if they are so convinced that higher taxes (“aka austerity”) will lead to bigger deficits, shouldn’t they also think that lower spending (“aka austerity”) will also lead to bigger deficits? That’s not the case, either.”

I’m not convinced you’ve shown that, although without a full report of the data collection and analysis you did it’s hard to tell. Some people will answer based on simplistic tribal affiliations (as you point out) and others will answer based on some economic theory (valid or invalid) based on their understanding (correct or incorrect) of what it says.

I don’t know exactly how you framed the questions because you haven’t told us, but I’m guessing they may also have been basing their answers on different time-frames. Austerity during a recession can (but won’t necessarily) reduce immediate fiscal deficits at the long-run cost of a stagnant economy and lost generation of workers; stimulus during a recession does increase immediate fiscal deficits whilst inducing a boom which eliminates the deficit altogether (unless politicians throw it all away by deciding there’s no longer any need to tax the rich …)

As far as I can tell, your analysis is way too simplistic to tease any of this out, and your original survey questions might make it impossible to do so anyway. And the fact that you scoff about ‘rainbows and ponies’ in the article suggests that the analysis was done without a sufficient understanding of the field of research to come up with anything useful anyway.

Statistics is the science which underpins all science, but it is of no practical value in and of itself. An applied statistician is useless (or worse) without a comprehensive understanding of the field they are working in. I’m not convinced that understanding is present in this case.

D Smith August 13, 2012 at 4:58 pm

So WHY in the hll would someone follow Keynesian Economic models TODAY without adjustments? John Maynard Keynes died in 1946. I do believe that off-shoring and some of todays financial-market trickery wasn’t prevalent prior to the end of WWII.

Jo August 21, 2012 at 1:42 pm

There has been a fair bit of work done on Keynes’s ideas since 1946, you know?

Keynesian stimulus was insufficient in the 1930s and was eventually provided by WWII – investment in technology for waging war and the jobs created by the need to rebuild infrastructure. The New Deal and (in the UK) the Post-War Consensus came about because the plutocrats of the day needed local workers and local military and they needed consumers in local markets, and it was recognised that a consumer economy cannot function unless the workers can afford to buy what they make.

It’s a completely different challenge today. The rich are busy moving their capital to Asia and developing a new middle class there – they don’t need the people of their now purely nominal country any more. The currently rich countries are not directly suffering the effects of the wars they wage and their moneyed elites see no value in investing in infrastructure when the action is happening elsewhere. What we are seeing is a straight switch – sweatshop economies becoming consumer economies and consumer economies becoming sweatshop economies, a process which will take decades to complete but which will be impossible to prevent unless democracy reasserts itself soon and the political class can be made to serve their people rather than their paymasters.

Keynes’s ideas are really simple – if the private sector won’t spend, the government has to (and when the private sector goes on a reckless spending spree, the government must reign it in to create the surpluses required to pay for the inevitable bust). But what that spending is on matters. There have been some ridiculous claims made recently by ignorant commentators claiming that the UK does not have austerity because it is spending more that it did before. But they’re spending more because austerity is self-defeating: tax receipts have gone down and unemployment has gone up. We’re spending in order to keep resources lying idle, instead of spending it on putting those resources to work.

Nowadays our most important and underdeveloped resource is human brains – brains that can develop new technology and brains that can put it to practical use. The obvious modern-day Keynesian stimulus is investment in developing sustainable energy resources and replacing an outdated industrial infrastructure which relies on unsustainable energy resources.

Asia is frantically investing in education whilst the West is busy making it unaffordable for all but the rich. There’s a reason for that, and it has nothing to do with making anyone but the super-rich better off.

SavageHenry August 22, 2012 at 10:12 am

Late to the game here, but still not convinced by the post or the discussion.

Why can’t I believe the following? Obama will spend a lot more than Romney, which means that the deficit will be higher, which means that the government will have to collect more taxes to pay for it.

That is, why do I have to see taxes, spending, and the deficit as contemporaneous under this survey? WHEN do the respondents expect the deficit to be higher? WHEN do they expect their taxes to be higher? If I’m a standard Republican, and I think about another Obama term, I might think the ACA is going to be super expensive, which means it will expand the deficit (leaving aside whether this is factually true or not) each year, which means my taxes are going to have to go up to pay for it all. Thus, I can believe, without being entirely magical in my thinking (aside from the knowledge of the ACA), that under Obama there will be both higher taxes and a higher deficit.

Not to mention, most Republicans see Dems (again, correctly or incorrectly) as being the big spenders, so even if in ONE YEAR the higher taxes REDUCE the deficit, the Dems would just keep spending. Sophisticated people might suggest that this means Dems would use higher projected deficits as excuses to raise taxes; whether the realized deficit is higher or not, a belief in future growing deficits is thus correlated with my views on higher taxes.

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