August 17, 2005
The Deficit Outlook
The Economist writes:
The not-so-incredible shrinking deficit | Economist.com: GEORGE BUSH has the dubious distinction of presiding over the largest negative budget swing in American history: from a surplus of $236 billion in 2000, the year he was elected, to a deficit of $412 billion, or 3.6% of GDP, when he stood again in 2004. Even in an economy with output of around $12 trillion, $648 billion is a lot of money to misplace.
Analysts were aghast when the Bush administration's Office of Management and Budget (OMB) projected [in February] that the fiscal year to September 2005 would bring bigger deficits still: $427 billion.... The more cynical observers suggested that the administration was simply releasing a gargantuan number for the pleasure of later telling voters that the budget deficit was closing faster than expected. In support of their argument, figures released by the Congressional Budget Office (CBO) in March projected a deficit of only $365 billion.
When the OMB revised its numbers sharply downward in July, to $333 billion, the doubting Thomases seemed to have a good case. Now, however, the CBO, which is generally seen as more level-headed, has followed suit. In its Budget and Economic Outlook, released on Monday August 15th, the CBO's projections moved roughly into line with the administration's, forecasting a shortfall of $331 billion, or roughly 2.7% of GDP.
Say not that the CBO has followed the administration's suit but that the administration has come back in line with reality. There has been about $34 billion of good budgetary news since February. That would have led a--normal--administration to lower its deficit forecast by $34 billion. But the administration lowered its deficit forecast by $94 billion. There's an extra $60 billion of fudge factor here.
The Economist's interpretation contained in its "however"--that the fact that OMB agrees with CBO now means that the OMB estimates last February that didn't agree with CBO's estimates were in fact on the level--simply doesn't follow.
Where the Economist does good is in pointing out that the this-year's deficit number is not where attention should be focused:
Douglas Holtz-Eakin, the CBO’s director, gave a warning that the improvement, while welcome, seemed to be largely temporary... an unexpected surge in corporate income tax receipts... stem[ming] from short-lived changes to the tax code. Further out into the forecast period, the CBO says its outlook is largely unchanged....
[M]any of the assumptions that the CBO makes, or is forced [by law] to make, seem rather far-fetched... that discretionary spending grows only at the rate of inflation... as if all of Mr Bush’s tax cuts were destined to expire on schedule, when in fact there is considerable interest in making them permanent.
But there’s one prediction it is making with a high degree of confidence: Social Security and Medicare... will eat up an increasing share of federal spending.... Social Security, Medicare and Medicaid, America’s health-care programme for the poor, will together account for more than half of federal spending by 2015....
And that Bushist economic policy is lousy:
[E]ven Mr Bernanke has stressed that deficit-reduction should still be a priority. “Not catastrophic” seems a poor guideline for fiscal policy, government or personal. For now, however, it appears to suit America’s politicians and consumers just fine.
Posted by DeLong at August 17, 2005 11:17 PM