Our current $500 billion annual deficit is not a problem: even with this fiscal push, employment is still far below full employment, capacity utilization is low, and production is far below potential output. But if the deficit does not fall as the economy recovers, it will start exerting a drag on long-run economic growth--a drag that my back-of-the-envelope calculations think will slow economic growth by between 0.5% and 1.0% per year, as the government's desire for cash begins to starve the economy of funds to finance investment.
Figuring out what the "current policy" is--what the deficit will be unless Congressmen and the President and his cabinet change their minds (or unless we change our Congressmen and President) is not a straightforward exercise. Here OMB Watch takes its shot at the problem. Their conclusion? Contrary to what the Bush Administration claims (surprise! surprise!), the deficit is unlikely to fall as the economy recovers:
Posted by DeLong at September 3, 2003 02:31 PM | TrackBackOMB Watch :: Budget WebLog: Beyond the Baseline: 10 Year Deficits Likely to Reach $5.9 Trillion The Congressional Budget Office%u2019s (CBO) August 2003 Budget and Economic Update shows a baseline projection of a $401 billion deficit for 2003, and a $480 billion deficit for 2004. The 10-year baseline projections show a $1.4 trillion deficit over the next ten years; however, as the report notes, the baseline is not intended to be a good predictor of actual budgetary outcomes. A better predictor of budget deficits under current policy would put the deficit for 2004 at $496 billion and the 10-year deficit at nearly $6 trillion...
No? It doesn't seem as if unemployment will improve (much?) either as the economy "recovers." Just as Brad has already predicted in fact.
4 Sept, 2003
U.S. jobless claims edge above 400,000 By Rex Nutting
WASHINGTON (CBS.MW) - Initial claims for state unemployment benefits edged above the 400,000 level for the first time in a month in the latest week, evidence that the labor market remains weak. The average number of first-time claims over the past four weeks increased to 401,500 in the week ending Aug. 30, up from 397,250 a week earlier, the Labor Department said Thursday. In the most recent week, initial claims rose by 15,000 to 413,000. It's the highest level since mid-July. The average number of workers collecting state checks over the past four weeks rose to 3.64 million in the week ending Aug. 23, the highest in five weeks. The insured unemployment rate remained at 2.9 percent.
Posted by: Pooh on September 4, 2003 05:54 AMHow can you be sure that current US employment is still far below full employment? If there was a "bubble" 95-2000, shouldn't that mean there was overemployment in that time frame?
But in reference to your next post about countercyclical deficits, it should be easy to say: if there is too much unemployment, deficits are good.
Posted by: Tom Grey on September 4, 2003 06:19 PM