Friday, October 10, 2014

Good News Cannot Be Good News When There Is Panic To Be Sown (Deficit Edition)

-- Posted by Neil H. Buchanan

In my newest Verdict column, which was published yesterday (and which I described and extended here on Dorf on Law), I begin by arguing that many Democrats agree with the Republicans' positions on many issues, to the country's (and the Democrats') detriment.  Before proceeding to the central point of the article -- the bipartisan misunderstanding of concepts like efficiency and regulation -- I briefly mention budget deficit hysteria as an obvious point of agreement among many Democrats and all Republicans.  (Do not forget that the infamous Bowles-Simpson duo is nominally bipartisan, and the Obama Administration created that misbegotten commission at the insistence of "centrist" former Democratic Senator Byron Dorgan.)

As part of that brief discussion about deficit mania, I wrote that the bipartisan commitment to annual balanced budgets "is a bit awkward, because it is simply inconsistent with another widely held notion, that the accumulated national debt must be paid down to zero."  I thought that I was making a rather obvious point, which is that one has to run annual surpluses in order to pay down debt.  In fact, if one were foolishly to commit the U.S. to reducing the current $12.8 trillion U.S. national debt to zero, it would require annual surpluses of $500 billion for over twenty-five years, even without taking into account the interest that will accumulate during that time.  As I argued in a symposium piece a few years ago, Why We Should Never Pay Down the National Debt, that would be both bad policy and politically unimaginable.

That does not stop the silliness, however.  I receive emails from a number of the "deficit scold" organizations, and it just so happens that this week saw the release of the Congressional Budget Office's new report showing that the deficit this year is running at less than 3% of GDP, which people who actually understand deficits know to be a very low number.  In short, even if one were to be more concerned about deficits than theory warrants, this is good news.  Yet one of the scold groups sent an email with the headline: "Deficit Falls to $486 billion, but Debt Continues to Rise."  Well, yes. that's how it works.  When there is a deficit, that adds to the debt.  Of course, that does not tell us anything useful, but it is certainly impossible to deny.  (I am not naming the specific scold group here for the simple reason that it does not matter which group happens to have written this particular email.  They are all ultimately funded by the same person, Pete Peterson, and their purpose is to create an "anti-deficit ecosystem" that feeds upon itself and takes over healthy habitats.)

Most of the group's email falls into the usual faux-caution meme, with claims that one year's deficit number should not be read out of context.  True.  However, their particular bullet point in support of the headline reads thus: "Even as deficits have fallen, debt has continued to rise, more than doubling as a percent of GDP since 2007 to record levels not seen other than during a brief period around World War II."  Of course, an annual deficit of only 2.8% of GDP will lead to a decrease in the ratio of debt to GDP, moving it down, not up.  Moreover, saying that "[e]ven has deficits have fallen, debt has continued to rise," is wholly misleading, because the increase in debt-to-GDP starting in 2007 happened when (and because) deficits rose during the Great Recession.  Suggesting that "falling deficits and rising debt-to-GDP" are somehow tied together is simply dishonest.

This willingness to count on readers' innumeracy is even more obvious in the email's previous bullet point: "Simply citing the 66 percent fall in deficits over the past five years without context is misleading, since it follows an almost 800 percent increase that brought deficits to record high levels." To use some simple numbers, did you know that if a deficit goes from $2 to $18, and then back to $2, it will have dropped only by 89%, after it increased by a whopping 800%?  So we're obviously worse off, right?  And in the meantime, GDP will have risen, so citing the deficit out of context is obviously designed to stoke fear.

It is all unbelievably crass, with another bullet point telling us this: "Both deficits and debt are projected to rise over the next decade and beyond, with trillion-dollar deficits returning by 2025 and debt exceeding the size of the economy before 2040, and as soon as 2030."  (The bold and italics in all quotes are in the original, of course.)  Of course, by the time that the deficit is a trillion dollars again, the GDP is projected to rise, too, such that trillion-dollar-deficits will be easily manageable.  And the possible (but not guaranteed) rise of debt to more than 100% of GDP is, as always, driven not by the dreaded "out-of-control spending on entitlements" but specifically by rising costs for medical care.  Moreover, they never admit that the supposed rise in debt-to-GDP is mild, reversible, and has not been shown to inflict any harm on the economy, especially compared to the costs of reducing deficits.  (The supposed 90% doom threshold was debunked long ago.)

Jonathan Chait's take on all of this in New York magazine is a must-read.  And Paul Krugman's comment on his blog, pointing out that the political types advising Obama were certain that he would be rewarded for being "the grownup," reminds me of a point that I made a few years ago: Would you rather be running for office as part of the "in party" with a debt of $13 trillion and a weak economy, or a debt of, say, $15 trillion and a strong economy?  Obama managed to win in 2012 despite taking the wrong side of that bet.  He might lose the Senate because of his mistake.  Yes, I am being reductionist.  But all of the evidence shows that strong economies, especially strong job markets, are good for incumbents.  And despite the scolds' best efforts, jobs beat scary debt numbers (especially manipulated, bullsh*t debt numbers) every time.

6 comments:

Mueed Peerbhoy said...

Dear Prof. Buchanan,

In paragraph 2, do you mean $500 billion instead of $500 trillion?

Neil H. Buchanan said...

Yes, thank you. It is billion, not trillion. Also, I have simplified and (I hope) clarified the numeric example in the fifth paragraph.

David Ricardo said...

"You can't fix stupid" - Ron White

Greg said...

The interesting thing here, especially after reading the Verdict column, is that this doesn't really say that "balanced" budgets are bad, but more that we should rethink what we mean when we say "balanced" budget. In particular, this would seem to indicate that "balanced" budget should not mean income equals expenditures, but instead should mean something like "debt remains fixed as a percentage of GDP."
Even by this metric, the last 10 years fail, as does the last 35 years.
I'll accept that the last 10 years is an impact of a poor economy, but doesn't the government eventually have to rein in spending if a poor economy is NEVER going to get better, and what was considered a poor economy has become the new normal?

David Ricardo said...

The post very nicely explains some of the lack of understanding about the federal budget, deficits and debt. But to expand, there is this.

1. Government is never going to pay down the national debt, in fact the national debt will probably never be reduced. This is ok, government is perpetual so as long as investors are willing to hold government debt it can be rolled over indefinitely.

2. Government fiscal accounting is a huge villain here. Unlike individuals and businesses, federal spending includes both operating expenses and capital items. A balanced budget should be defined as the situation where tax and fee revenues equal operating expenses.

3. Government should operate at a larger surplus, that is, revenues in excess of operating expenses when the economy is at full employment. The greater the threat of inflation the greater should be surplus as defined above and the lower the amount of capital expenditures financed by debt.

4. Government should operate at a smaller surplus, that is a greater amount of debt financed capital projects when the economy is at less than full employment, has low inflation and low interest rates. This not only stimulates the economy but with interest rates very low the likelihood that the capital expenditures will produce a net positive return is very high. Investments in education or infrastructure for example financed by borrowings when interest rates are low will almost certainly return their costs plus interest in the form of higher taxes generated by higher economic activity.

Yes, government should operate like a business. But part of the problem is that those who say that have little understanding of what it means. And yes, the deficit has been part of the reason the U. S. recovery has been so weak, the problem being that the deficit was too small, not too large and too much directed at tax cuts for the wealthier and not enough at targeted government spending in high unemployment areas.

aminos lahragui said...


Very awesome post , i am really impressed with it a lot


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