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.