President Barack Obama aimed to refocus the national debate and put the economy front and center with a speech at Knox College in Illinois. It was the same place he spoke as a senator in 2005 about the need for the government to help the middle class. He stuck to that theme in this speech, but now as president, he summarized the improvements that have come on his watch.
He talked about millions of new jobs, burgeoning energy production, and the nation’s improving balance sheet. "Our deficits are falling at the fastest rate in 60 years," Obama told the crowd.
In light of Obama’s ongoing battle with Republicans over taxes and spending, we thought this would be an interesting claim to examine. In this factcheck, we look at whether we are really seeing one of the most rapid declines in the deficit in many decades.
As a reminder, the deficit is a snapshot of one year’s fiscal outlook. It’s the shortfall between what the government spends and what the government collects in taxes and other revenues.
The White House press office told us that the proof is in the numbers. They tracked the deficit as a percent of the entire economy, measured as the Gross Domestic Product.
In 2009, the first year of Obama’s presidency, after tax cuts and new spending, the deficit was 10.1 percent of GDP. In 2012, the deficit declined to 7 percent of GDP. So that’s a decline of 3.1 percentage points.
You have to go back 63 years to the period between 1946 and 1949 to find a bigger four-year drop than what the country saw between 2009 and 2012. Right after World War II ended, the U.S. deficit stood at 7.2 percent of GDP. By 1949, America had a surplus of 0.2 percent. So that’s a decline of 7.4 percentage points.
We downloaded data from the Office of Management and Budget that shows the deficit as a percent of GDP all the way back to 1930. When we ran the numbers, we found, as Obama said, you need to go back to 1946 to find a larger change.
The numbers game
As with any statistics, you have to be careful, and to help us be careful, we contacted five economists and policy analysts. The White House simply did a little subtraction to measure the difference between the numbers at the start and the end of the four years.
There is another option, which is to look at the relative size of the decline. So if the deficit went from 10.1 percent of GDP to 7 percent of GDP, that means the deficit dropped 30 percent. But when we did this going back to World War II, we saw some very strange results. Big deficit declines could look smaller in relative terms than small declines.
Jason Peuquet, research director at the Committee for a Responsible Federal Budget, a bipartisan organization that seeks to reduce deficits faster than the president has done, confirmed that point. Peuquet said the administration has the right approach, because relative numbers can make very different changes look the same.
Peuquet gave the example of a deficit of 1 percent of GDP in the first year and 0.5 percent after four years.
"That would look like a 50 percent improvement in the level," Peuquet said. "However, a change in deficits that went from 10 percent of GDP to 5 percent of GDP would also register as a 50 percent improvement – despite being a much larger change in relation to the economy."
Peuquet and others raised a second statistical issue -- choosing the endpoints for the comparison. It’s a common device to pick the range that best proves your point.
But in the case of deficit reduction, no one quibbled with the idea that longer periods are more revealing, and Obama used all the years he has available. His first year in office was 2009 and the numbers for 2013 are not yet in.
To the extent that a majority view emerged, economist Alan Auerbach at the University of California Berkeley probably expressed it best.
"There is no single ‘correct’ way of doing the analysis," Auerbach said, "but I would say that their approach is a reasonable one."
One reason Obama is able to point to an historically high decline is because the deficit as a percent of GDP had never been higher. Steve Ellis of Taxpayers for Common Sense, an advocacy group focused on taxes and spending, said the reduction is significant. But at the same time, he said, "Let’s face it, there was a lot to reduce. The deficit was morbidly obese."
Similarly, the economy took a major hit which gave it more room for improvement in historic terms. So even a moderate recovery has eased the deficit by both increasing tax receipts and reducing demand for government aid such as unemployment support.
Lastly, while the deficit might decline, the country’s accumulated debt is projected to grow.
"The future path is not captured in snapshots of what happened over the past few years, Peuquet said. "It ignores the unsustainable debt trajectory the country still faces."
Barack Obama said the deficit has fallen at the fastest rate in 60 years. While economists vary on how to best measure that decline, the president used an acceptable approach and his numbers are accurate. There are no statistical tricks in play.
Our experts warned against reading too much into Obama’s claim. While Obama did not spend much time one way or the other on the significance of the decline in the deficit, he didn’t mention ongoing concerns over the national debt.
We rate the statement True.
White House, Remarks by the President on the economy - Knox College, Galesburg, Ill., July 24, 2013
Email interview with Robert Whithorne, White House Press Office, July 24, 2013
Office of Management and Budget, Table 1.2 - Deficit as percent of GDP
Interview with Eugene Steuerle, senior fellow, Urban Institute, July 24, 2013
Email interview with Harvey Rosen, professor of economics, Princeton University, July 24, 2013
Email interview with Alan Auerbach, professor of economics and law, University of California Berkeley, July 24, 2013
Email interview with Steve Ellis, vice president, Taxpayers for Common Sense, July 24, 2013
Email interview with Jason Peuquet, research director, Committee for a Responsible Federal budget, July 24, 2013
PolitiFact, Harry Reid says deficit has been reduced $2.5 trillion over past two years, March 21, 2013
Washington Post, Obama’s economic vision forged in 2005 commencement address at tiny Knox College, July 22, 2013
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