What if the deficit is not a problem?


Posted by AzblueMeanie:

The Tea-Publican Party and its echo chamber in the "lamestream" media are very good at confusing people who are uninformed in economics by interchangeably using "deficit" (a shortfall in an annual budget) with "debt" (accumulated debt over time).

If Jay Leno were to do his Jay Walking segment and ask the average American what the "deficit" is this year, if he got any answer at all it would likely be something they vaguely recall having heard in the "news," from $11 trillion to $17 trillion (that would be the "debt," which is approaching $17 trillion). The federal budget "deficit" in 2013 is projected to be $845 billion.

The federal budget deficit has been declining and is on a downward slope. As Paul Krugman recently explained, Gone Deficit Gone:

So says the CBO, although not directly.

Anyone who is serious (as opposed to Serious) about matters fiscal knows that it’s highly misleading just to focus on the raw deficit numbers (ONE TRILLION DOLLARS), for two reasons.

First, fluctuations in the deficit tend to be driven by the business cycle; when the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget.

Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP.

So CBO is now out with its latest report on automatic stabilizers. It estimates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.

How does this compare with the deficit consistent with fiscal sustainability? Well, there’s about $11.5 trillion in federal debt in the hands of the public. A reasonable, indeed fairly conservative guess is that nominal GDP will in future grow by 4 percent per year, half from real growth and half from inflation. This means that the sustainable deficit is 4 percent of $11.5 trillion, or $460 billion. Hey, we’re there!

And next year the adjusted deficit is projected to be much smaller:


Yes, late this decade deficits will start to rise again thanks to rising health costs and an aging population, yada yada. But I have yet to hear a coherent argument about why the long-term problem of paying for the benefits we want — which will eventually have to be resolved through a combination of cost savings and revenue increases — should constrain our fiscal policy right now, in the midst of what remains a terrible economic slump.

And I would say that the figure above is, in fact, a portrait of deeply irresponsible fiscal policy — because it is just crazy that in this deeply depressed economy we are now pursuing a fiscal policy that is tighter than the policy we followed at the height of the housing bubble.

So let’s try to stop doing that. And everyone repeat with me: there is no deficit problem.

Now comes more good economic news about the deficit today. Jonathan Bernstein reports, What if there’s no deficit problem?:

Everyone who cares at all about budgets, deficits, and debts needs to
look very carefully at the charts Sarah Kliff walks us through today
from the Economic Report of the President. The finding? Medicare may — may — no longer be a cost problem.

And if that’s the case, there’s really no deficit problem.

Remember, in the short and medium run, most economists say that
current budget deficits, especially after all the deficit-cutting over
the last two years, are not a problem. It’s true that there are
deficits, but they’re falling from recession-induced highs, and at any
rate interest rates are low so the effects of deficits are minimal. The
real problems come later, and are almost completely caused by expected
exploding health care costs.

But what if health care costs are no longer rising faster than GDP?
In fact, if health care costs follow what’s been happening over the last
several years, there will be no explosion at all — and that would mean
budget savings of about 2 percent of GDP a year in about twenty years.
That’s enough to entirely wipe out the real threat of budget problems.
Of course, we don’t know whether this moderation will continue, but it
very well might.

What this really means is that we need an immediate moratorium on
“grand bargain” talk. We need a halt to any major reforms undertaken
purely for budgetary reasons — either the major cuts that Republicans
have pushed for or the search for a deficit reduction deal exchanging
spending cuts for new revenues that Barack Obama wants
. It means the
best replacement for sequestration is probably nothing, at least for
now. And, most of all, it means continuing to implement the Affordable
Care Act, especially those provisions that are intended to reduce costs.

Is it possible to move everyone off of their focus on budget deficits?
Probably not. But surely, if the actual facts of the fiscal situation
were what drives the conversation, that would be where everyone was

I would point out that the Progressive Caucus Budget which calls for allowing Medicare to use its bargaining position with providers to reduce costs (this is currently prohibited by the Medicare Part D prescription drug subsidy to Big Pharma) and for a public option that allows people to buy into Medicare, this would dramatically reduce and constrain the growth in medical care costs over time, thus reducing and perhaps eliminating the federal budget deficit and stop adding to accumulated federal debt. Tea-Publicans oppose this, of course, because they like to profit from corporate welfare and want to privatize Medicare.

Previous articleZombie Economics: Night of the Living Austerians
Next articleTwo votes demonstrate the new GOP is same as the old GOP
AZ BlueMeanie
The Blue Meanie is an Arizona citizen who wishes, for professional reasons, to remain anonymous when blogging about politics. Armed with a deep knowledge of the law, politics and public policy, as well as pen filled with all the colors stolen from Pepperland, the Blue Meanie’s mission is to pursue and prosecute the hypocrites, liars, and fools of politics and the media – which, in practical terms, is nearly all of them. Don’t even try to unmask him or he’ll seal you in a music-proof bubble and rendition you to Pepperland for a good face-stomping. Read blog posts by the infamous and prolific AZ Blue Meanie here.


  1. Good point. Although I have to warn you that you will probably be hearing from our resident Ron Paul “kill the Fed” and “cross of gold” pseudo-Libertarian commenter.

  2. In addition, lets add the fact that we live in a Chartalist Monetary System, where the US has a monopoly on issuing currency, therefore we are monetarily sovereign…and as such we can never go Bankrupt lets then
    examine this article plus this article

    Biggest GOP lie> “Gov needs to live within its means”
    U.S. MonetarySystem101-Chartalism: We have a Chartalist Monetary System

    US Media, MSM, rightwing media, leftwing media, Republicans, Democrats, Independents, Libertarians do not acknowledge our present Monetary System yet keep us uninformed by making us think we still operate under commodity based money such as the gold standard or some other form of limited federal reserve. Federal Budgets do not need balance only reflect National priorities on spending, but on a Chartalist System there can be no Fiscal Crisis.