Lecture Thirty One
Measuring the Deficit
(Economics 100b; Spring 1996)
Professor of Economics J. Bradford DeLong
601 Evans, University of California at Berkeley
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net
April 22, 1996
Administration
Review
The "Unified" Deficit
The "On Budget" Deficit
The Inflation-Adjusted Deficit
The Capital-Budget Deficit
Conclusion
Administration
Review
Let me briefly review last Friday's lecture. The U.S. has had--for a
number of years--persistent, peacetime, structural deficits leading
to a relatively high value of the national debt as a share of GDP--a
higher value than had been seen in the U.S. since the 1950s.
However, the U.S. is far from being alone in having a substantial
national debt:
Why worry about the national debt? Because it is a drag on U.S.
productivity through higher tax rates... 60% of GDP x 2.5% real
interest rate means that 1.5% of U.S. real GDP is taxed just to be
transferred.
- Say, an elasticity of labor and capital supply of -0.5--would
mean that we are now poorer by about 0.75% of GDP as a result of
the fact that we have a large accumulated national debt to service
than if we were, say, debt-free.
- In one sense, it is as if we had an unemployment rate 0.75%
higher forever; in another sense not--distributional impact is
very, very different
Our experience of peacetime structural deficits very new. In the
old days, little debt. In fact, in the old days, little federal
government. Debt-to-GDP ratio up to perhaps 30% of National Product
in a war, but little outside of a war.
Pattern of spending. Post-Civil War return of spending to a very low
level. Run your national debt/GDP ratio down to zero after a war.
Andrew Jackson paid off the national debt in the 1830s. Post-Civil
War debt. Veterans' bonus programs. 1913 debt of 3% of GDP; 1930 debt
of 20% of GDP; 1975 debt of 25% of GDP.
With the Great Depression, the movement of the federal government
into infrastructure spending in a big way for the first time, and so
forth (Social Security system) civilian spending bounced up to nearly
ten percent of GDP. And then came World War II, the Korean War, and
the postwar military-industrial buildup associated with the Cold War.
Taxes kept pace--and the underlying growth of the American economy
steadily reduced the outstanding national debt as a share of GDP.
(Expand on this: D/Y down from 112% at the end of WWII to perhaps 25%
in the mid-1970s.)
But since the end of the 1970s things have turned very strange:
doubling of debt-to-GDP; first-time emergence of large persistent
peacetime budget deficits.
Three reasons for post-1980 deficits:
- The post-1973 productivity slowdown
- The Reagan tax cuts (the Laffer Curve; too small by a factor
of three or more; not to say that there aren't lots of times and
places where Laffer Curve effects are important)
- Loss of political immunity against budget deficits as a result
of "Keynesian" expenditure policies. Cyclical deficit--good;
structural deficit--bad seems just a little bit too hard a lesson
for American politics to keep in its small collective brain.
One non-reason (that you will find if you look at, say, the
Wall Street Journal editorial page)
- Legislative changes in 1974 that established the current
congressional budgeting office, and (they claim) created a
persistent bias toward spending and excessive deficits.
I have never been able to make any sense out of this argument at
all; in the 1980s (and so far in the 1990s as well), actual budget
outturns have always shown a smaller deficit than original
presidential submissions; and congressional legislation has always
shown a smaller deficit than the presidential submission. Spending
priorities have been changed--yes (in the 1980s toward less defense
and more social programs than Reagan asked for; in the 1990s the
reverse. But overall legislation tracks the presidential
submission.
The "Unified" Deficit
Start with the actual federal budget deficit as a share of GDP. Worry
is the effect on national saving and investment. Thus a
"cyclical" deficit is not a worry: a "cyclical" deficit is not a
crowder-out of saving and investment--to first order--but is a boost
to GDP (and possibly belief that cyclical deficits will be permitted
in the future is a boost to saving and investment now.
So start by moving from the "actual" to the "high employment" deficit
to GDP concept.
It doesn't change the picture that much. It makes the sharp
deterioration in the early 1980s a little sharper; it makes the
deterioration in the early 1990s an almost entirely cyclical
event...
The "On Budget" Deficit
But there's more. The social security surplus: should it be
counted as part of the "budget deficit"? Well, to the extent that
people view their social security contributions as taxes, yes. To the
extent that people view their social security contributions as
substitutes for savings, no...
The Inflation-Adjusted Deficit
And there is the adjustment for the inflation component of the
debt...
The Capital-Budget Deficit
And there are all of the "capital budgeting" issues. Federal
borrowing to finance public investment is not a crowder out of
capital...
Conclusion
Make all the adjustments you should make, and the federal budget
today is in rough balance...
- Now it is projected to go out of balance in the future...
- It has not been in balance in the past...
- And, given that the U.S. has a low savings rate, perhaps we
should be aiming for something better than balance...
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