Lori Montgomery took a trip down memory lane today, looking at the choices made over the past decade – most of them when Republicans held the Presidency and both houses of Congress – that led to the explosion in the national debt, when CBO forecasters predicted a full payoff of obligations at the time. It’s a bit shameful that we even have to have this discussion, that you have to point out that massive tax cuts for the rich and unfunded health care benefits and two wars will increase the debt. And two recessions, including the largest one since the Depression, can account for most of the rest.
But in many ways this is a false discussion. It looks at CBO projections as if they have a successful track record. The fact is that they don’t. And a recent example of how the CBO gets things wrong opens a window into the best way to turn those predictions around – through improving and growing the economy.
If we go back in 1996, we see that the Congressional Budget Office (CBO) was still projecting a large deficit for the year 2000. In May of 1996 CBO projected that the deficit in 2000 would be $244 billion or 2.7 percent of GDP. It turned out that we actually ran a surplus in 2000 of $232 billion, or roughly 2.4 percent of GDP. This involves a shift from deficit to surplus of $476 billion or 5.1 percentage points of GDP. This would be equivalent to reducing the annual deficit by $750 billion in 2011 [...]
As the chart shows, all of the improvement in the budget between 1996 and 2000 was due to the fact that the economy performed much better than expected and that CBO had been overly pessimistic about trends in government spending and tax collections. The legislative changes added by Congress in this period actually went the wrong way. So, we did not actually move from large deficits to surpluses by tax increases and/or spending cuts, we did it through a strong economy and some good luck with the cost of government programs and tax collections. (The biggest part of this picture is that Alan Greenspan ignored the orthodoxy in the economics profession and allowed the unemployment rate to decline by almost 2 percentage points below the conventionally accepted estimates of the NAIRU*, but we won’t talk about that.)
Now, how far we move the deficit needle over the long term is somewhat ancillary to my main point. In truth, there’s nothing like economic growth to reverse these kinds of projections and increase human welfare. When the economy grows more jobs are created. That leads to increased revenue and less money spent on automatic stabilizers like unemployment benefits and food stamps and Medicaid. Right now, with low borrowing costs and core inflation tracking below the baseline, the biggest single problem in the economy is a lack of jobs and a shortfall in demand. That was true in 2009, it was true in 2010 and it’s true today. But that barely merits a discussion in Washington.
If you look at what held back GDP growth in the first quarter it was a reduction in government purchases. The slack housing market had something to do with it as well. Both of those problems are within Washington’s capacity to fix, but they’re too preoccupied with the budget deficit to care. But this gets the issue entirely backwards: we should want sustained economic growth because it would increase the welfare of the citizens of the country, and as an added side benefit it’s the only way to meaningfully bring down the deficit, which is an impossibility in a time of 8-9% unemployment without letting people starve or die of untreated illness.
This is why some people talk about economics in crisis.




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Then there’s our answer: We need to re-hire Greenspan. What could go wrong?
The pursuit of “cutting the deficit” is another part of the Beltway shell game since there is no chance that the meat of the deficit, military/war spending, Medicare/Medicaid, and trillions in tax cuts for the rich will be substantially off the table. SS doesn’t even figure into it since it is self funded thru the FICA payroll tax, contrary to the Simpson-Peterson Institute bleating of outright lies about it.
The pols are running circles around the voters. Disenfrancisement, supersized.
kipchuk, I agree. It always seems to be that way, in the end, regardless of how serious conditions are said to ge getting.
Regarding CBO, it is nominally a non-partisan entity. No fault of their own, yet don’t they function as a pocket calculator on steroids? Whatever variables are sent their way, they will diligently figure.
If CBO is too useful by half should we wonder about it? Whom do we hold accountable for that pliable situation?
Hey eCAHN, I was surprised not to see you at the Shaxson book salon yesterday. Thought it would be up your alley. Did you decide to get a life or something? *G*
Yes, but in order to get our economy moving companies would have to start investing in America instead of China and India.
You know that won’t happen.
My niece was visiting for the weekend, and we went on an outing to West Point, then dinner with friends. I’m sorry I missed it. Heard Shaxson on democracynow & he’s a treasure.
When do we get to start calling this a “depression”? Okay, I know there are some “technical measurements” for defining recession/depression, but who can claim that this is a mere “recession.”
And ditto re that crap about the “recession ending” and “unemployment improving.”
Garbage in, garbage out.
What you’re forgetting, David, is what Barry has told you over and over: The federal government is just like a family: It can’t spend more than it takes in.
When you have a POTUS who is that fucking stupid — or, if he knows better, that fucking crooked — there is no hope.
i think there is hope if everyone else knows what our POTUS claims not to.
um. delong is one of the reasons i think economics is in crisis.
is he still arguing against capital controls, saying he likes tim [geithner], etc?
Selise–I’m in a very pessimistic frame of mind. Feel free to cheer me up.
But everybody doesn’t know and it’s in the short term financial interest of a lot of people who do to make sure as many people as possible don’t. The “like a family” analogy has a lot of intuitive appeal. Multiplier effects of government spending–not so much.
there does seem to be some strange reluctance to discuss simple macro concepts like the fallacy of composition.
so sorry, don’t have much cheer today. will some perseverance do? from galbraith at the ada:
Most of the talk on economics is nonsensical. Everyone in the congress should read the blog
http://bilbo.economicoutlook.net/blog/?p=332
for an explanation of modern monetary theory and why “deficit” is really a misnomer. A nomenclature change to “funding source” or “investment” would be better because deficit has unfortunate connotations for households and the government is not similar to any household. It is the source of money which it can create as much as is necessary to maximize the economy which occurs at full employment.All the talk about “deficits” and “crisis” is absurd.
Thanks Selise, that’s a very timely quote which James Galbraith chose to highlight. His overall statement reminds me of a quote from his father:
John Kenneth Galbraith
We’re certainly missing that kind of leadership in Obama’s Washington DC. If anything, Obama’s DC is a fear factory. At least the public isn’t buying into establishments bogus recovery narrative: Most Americans say U.S. in recession despite data: poll. Folks are noticing that the emperor has no cloths, we just need to keep up the pressure.
great quote. thanks!