Two posts yesterday, and the first for this morning. First post yesterday was “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.
Next up was “The English Prisoner:”
“If this plan is working, what would a failing one look like?” So asks Martin Wolf in response to David Cameron’s speech insisting that his austerity policy was right, is right, and is succeeding. Simon Wren-Lewis goes through Cameron’s assertions in some detail, among other things catching him more or less lying about what the Office of Budget Responsibility — roughly speaking the counterpart of the CBO here — ha actually said about the impact of austerity on growth.
I was particularly struck by the way Cameron is still claiming that Britain’s low interest rates show that his policy is successful and necessary. This is a bit like the high priest sacrificing a virgin once a month to ensure that the sun keeps rising, then claiming that the fact that the sun has risen proves that the sacrifice was indeed necessary. The obvious test is to compare Britain with other countries; if Britain’s 2.07 percent bond yield validates his policies, does America’s 2.05 percent yield validate Obama’s? Or better yet, does France’s 2.10 percent yield validate Hollande’s? Or is the point, perhaps, that every country that borrows in its own currency (or, in the case of France, finally has a central bank willing to do its job by providing liquidity) can now borrow cheaply?
The trouble, of course, is that Cameron’s political career and his very identity are now totally bound up with his austerity crusade. He’s a prisoner of his past, who can’t and won’t change course. Instead, his incentives are all about gambling for redemption — sticking with the policy in the hope that something turns up that will somehow make him a hero.
Today’s first post is “Stephanopoulizing:”
On this morning. I think we’re talking about horsemeat, or something.