A $1 tril­lion deficit isn’t as ter­ri­ble as many say

Austin American-Statesman - - BALANCED VIEWS - Krug­man writes forThe New York Times.


you might imag­ine, I find my­self in a lot of dis­cus­sions about U.S. fis­cal pol­icy, and the bud­get deficit in par­tic­u­lar. And there’s one thing I can count on in th­ese dis­cus­sions: At some point some­one will an­nounce, in dire tones, that we have a $1 tril­lion deficit.

No, I don’t think the peo­ple mak­ing this pro­nounce­ment re­al­ize that they sound just like Dr. Evil in the Austin Pow­ers movies.

Any­way, we do in­deed have a $1 tril­lion deficit, or at least we did; in fis­cal 2012, which ended in Septem­ber, the deficit was ac­tu­ally $1.089 tril­lion. (It will be lower this year.) The ques­tion is what les­son we should take from that fig­ure.

What the Dr. Evil types think, and want you to think, is that the big cur­rent deficit is a sign that our fis­cal po­si­tion is com­pletely un­sus­tain­able. Some­times they ar­gue that it means that a debt cri­sis is just around the cor­ner, although they’ve been pre­dict­ing that for years and it keeps not hap­pen­ing. (U.S. bor­row­ing costs are near his­toric lows.) But more of­ten they use the deficit to ar­gue that we can’t af­ford to main­tain pro­grams like So­cial Se­cu­rity, Medi­care and Med­i­caid. So it’s im­por­tant to un­der­stand that this is com­pletely wrong.

Now, Amer­ica does have a long-run bud­get prob­lem, thanks to our ag­ing pop­u­la­tion and the ris­ing cost of health care. How­ever, the cur­rent deficit has noth­ing to do with that prob­lem, and says noth­ing at all about the sus­tain­abil­ity of our so­cial in­surance pro­grams. In­stead, it mainly re­flects the de­pressed state of the econ­omy — a de­pres­sion that would be made even worse by at­tempts to shrink the deficit rapidly. So, let’s talk about the num­bers. The first thing we need to ask is what a sus­tain­able bud­get would look like. The an­swer is that in a grow­ing econ­omy, bud­gets don’t have to be balanced to be sus­tain­able. Fed­eral debt was higher at the end of the Clin­ton years than at the be­gin­ning — that is, the deficits of the Clin­ton ad­min­is­tra­tion’s early years out­weighed the sur­pluses at the end. Yet be­cause gross domestic prod­uct rose over those eight years, the best mea­sure of our debt po­si­tion, the ra­tio of debt to GDP, fell dra­mat­i­cally, from 49 to 33 per­cent.

Right now, given rea­son­able es­ti­mates of likely fu­ture growth and in­fla­tion, we would have a sta­ble or de­clin­ing ra­tio of debt to GDP even if we had a $400 bil­lion deficit. You can ar­gue that we should do bet­ter; but if the ques­tion is whether cur­rent deficits are sus­tain­able, you should take $400 bil­lion off the ta­ble right away.

That still leaves $600 bil­lion or so. What’s that about? It’s the de­pressed econ­omy — full stop.

First of all, the weak­ness of the econ­omy has led di­rectly to lower rev­enues; when GDP falls, the fed­eral tax take falls too, and in fact al­ways falls sub­stan­tially more in per­cent­age terms. On top of that, rev­enue is tem­po­rar­ily de­pressed by tax breaks, notably the pay­roll tax cut, that have been put in place to sup­port the econ­omy but will be with­drawn as soon as the econ­omy is stronger (or, un­for­tu­nately, even be­fore then). If you do the math, it seems likely that full eco­nomic re­cov­ery would raise rev­enue by at least $450 bil­lion.

Mean­while, the de­pressed econ­omy has also tem­po­rar­ily raised spend­ing, be­cause more peo­ple qual­ify for un­em­ploy­ment in­surance and means-tested pro­grams like food stamps and Med­i­caid. A rea­son­able es­ti­mate is that eco­nomic re­cov­ery would re­duce fed­eral spend­ing on such pro­grams by at least $150 bil­lion.

Putting all this to­gether, it turns out that the tril­lion-dol­lar deficit isn’t a sign of un­sus­tain­able fi­nances at all. Some of the deficit is in fact sus­tain­able; just about all of the rest would go away if we had an eco­nomic re­cov­ery.

And the prospects for eco­nomic re­cov­ery are look­ing pretty good right now — or would be look­ing good if it weren’t for the po­lit­i­cal risks posed by Repub­li­can hostage-tak­ing. Hous­ing is re­viv­ing, con­sumer debt is down, em­ploy­ment has im­proved steadily among prime-age work­ers. Un­for­tu­nately, this re­cov­ery may well be de­railed by the fis­cal cliff and / or a con­fronta­tion over the debt ceil­ing; but this has noth­ing to do with the al­leged un­sus­tain­abil­ity of the deficit. Which brings us back to $1 tril­lion. We do in­deed have a big bud­get deficit, and other things equal it would be bet­ter if the deficit were a lot smaller. But other things aren’t equal; the deficit is a side-ef­fect of an eco­nomic de­pres­sion, and the first or­der of busi­ness should be to end that de­pres­sion — which means, among other things, leav­ing the deficit alone for now.

And you should rec­og­nize all the hyped-up talk about the deficit for what it is: yet an­other disin­gen­u­ous at­tempt to scare and bully the body politic into aban­don­ing pro­grams that shield both poor and mid­dle-class Amer­i­cans from harm.

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