Brief reminder about the deficit

I’m probably not the only one on vacation now half-heartedly paying attention to the Twitter streams and RSS feeds from folks still working. Yet during one of my rare downtimes flipping through posts I found this excellent Evan Soltas piece on the structural deficit. Here, I’ll let him sum it up (emphasis mine):

If those so-called deficit hawks would stop moralizing long enough to look at the data, they might find something surprising: That data almost entirely undermine their argument.

Yes, the long-run path of spending on federal health programs remains a serious and legitimate source of concern. But the numbers show that our current fiscal deficit is well within control — as have been the deficits of the last five years.

The right way to evaluate the U.S.’s current fiscal condition is not to look at at its budget deficit, which fluctuates sharply due to economic conditions. Rather, it is to calculate the structural budget deficit, the difference between government spending and revenues when the economy is normal. (More technically, it is when the “output gap,” the difference between actual and long-run potential economic output, is zero.)

Soltas includes this helpful graph:

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Of those who are not of the deficit hawk persuasion (or, more usually, the shrink the federal government persuasion) this perspective isn’t all that unique. The astounding deficits of the last few years are largely cyclical in nature — millions of people out of work and not paying taxes coupled with social insurance programs to soften their falls. Revenue falls while automatic spending (outside the realm of any temporary extra measures) rises. This is a concept that should be fairly intuitive. Evan’s graph above reflects that view, and you should click through to read his full piece for more on the revenue/expenditure gap.

So yes we have a long-term structural ‘crevasse’, but as he notes that gap of 2 percent of GDP is easily manageable. Hence you (might) have read reasonable people call for the polity to prioritize the sluggish economy over the (largely) cyclical deficit. The polity seems, despite those efforts, more focused on short-term political realities and long-standing fights on taxes and entitlements.

Anyway, rambling aside, I thought it a good reminder — especially given the winter break ‘VSP’ shenanigans — that the fiscal cliff is an entirely manmade austerity-bomb meant to solve a problem that involves the inability to distinguish between the structural and cyclical.

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