And you thought Bush's budget deficits were bad...

[Surlethe]

Here's an economist's blog entry on the deficit:

Greg Mankiw's blog:

I love the title of the Obama administration's budget document, "A New Era of Responsibility." But do the numbers back up the marketing? In particular, should deficit hawks rejoice in this new found responsibility in the nation's capital? Are we about to put federal government on a sounder fiscal footing, leaving a smaller debt to future generations?

Few economists would blame either the Bush or Obama administrations for running some degree of budget deficit during economic downturns. While we might argue about the size of the appropriate deficit, lower tax revenue and greater outlays on, say, unemployment insurance are a natural and appropriate response to recessions and their immediate aftermath. What is more telling is what happens to the budget picture during periods of economic normalcy.

With that perspective in mind, let's compare the previous and current administration.

During the period 2005 to 2007, the U.S. unemployment rate hovered in the ballpark of 5 percent. What was the budget balance? According to OMB historical documents, the budget deficit averaged just under 2 percent of GDP during those three years.

Now compare these results to the new Obama budget. For the moment, let's put aside concerns about the economic forecast on which the budget is based and take their figures at face value. According to the Obama administration numbers, the economy will reach normalcy of 5 percent unemployment in year 2014, and they project unemployment remaining at that level thereafter. (I infer they take 5 percent to be an estimate of the natural rate of unemployment, which seems reasonable.) What happens to the budget balance when we get to that long-run equilibrium? According to their numbers, under their proposed policies, the budget deficit will average a bit over 3 percent of GDP during that time.

The bottom line: If you are a deficit hawk who lamented the Bush budget deficits, the new administration's budget should not make you feel much better. President Obama will give us different fiscal priorities than President Bush did, but the borrowing and debt imposed on future generations will not be very different, at least if the numbers presented in the Obama administration's own budget document can be trusted.

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

[ray245]

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

The question I have to ask , is this the best result everyone can hope for in order to get out of this great recession and how long does it take for anyone to hope for a balanced budget? I mean even the New deal resulted in budget deficits as well. Is expecting the budget deficit to pay off by 2014 pretty unrealistic?

[Surlethe]

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

The question I have to ask , is this the best result everyone can hope for in order to get out of this great recession and how long does it take for anyone to hope for a balanced budget? I mean even the New deal resulted in budget deficits as well. Is expecting the budget deficit to pay off by 2014 pretty unrealistic?

I think you're mixing up "deficit" and "debt"; it's not unreasonable to expect the budget deficit to go away when the economy's good, but it's pretty unrealistic to expect to pay off the debt by 2014. The point the op/ed is making is that the Obama budget is predicted to run deficits when the economy is good.

[ray245]

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

The question I have to ask , is this the best result everyone can hope for in order to get out of this great recession and how long does it take for anyone to hope for a balanced budget? I mean even the New deal resulted in budget deficits as well. Is expecting the budget deficit to pay off by 2014 pretty unrealistic?

I think you're mixing up "deficit" and "debt"; it's not unreasonable to expect the budget deficit to go away when the economy's good, but it's pretty unrealistic to expect to pay off the debt by 2014. The point the op/ed is making is that the Obama budget is predicted to run deficits when the economy is good.

Point noted. Although which part of Obama's economic policy is going to cause the budget deficit to begin with?

[Pablo Sanchez]

I think you're mixing up "deficit" and "debt"; it's not unreasonable to expect the budget deficit to go away when the economy's good, but it's pretty unrealistic to expect to pay off the debt by 2014. The point the op/ed is making is that the Obama budget is predicted to run deficits when the economy is good.

It might be due to the White House delaying the release of information on policies it plans to implement only if and when the various problems we're dealing with improve, like cuts to the defense budget upon successful withdrawal from Iraq, or tax increases contingent on improved economic performance. These kinds of things are necessary in the long term, but talking about them now would be politically damaging ("it's irresponsible to even mention future tax hikes during a recession!")

I realize that this sounds like Obama apologism, so I just want to say that this is what I hope is going on, not that I necessarily believe it. The resistance to raising taxes is very strong in American politics, as can be seen in the recent California problems--"Option A: raise taxes, Option B: pass no budget, watch CA burn; Answer: ME HATE TAXES!"

[Darth Wong]

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

It does look irresponsible, until you realize that Bush was doing it during a period of high economic growth when he really didn't need to (and in fact, he should have tried to cool off the overheating economy to prevent just this sort of correction), whereas Obama believes he doesn't really have any choice at this point.

Bad times are when you should borrow to get through. Borrowing during good times when you could afford to balance your books is sheer insanity.

PS. I suppose the latter statement is invalidated if the borrowing is for some sort of long-term investment, but I think we all know that's not what happened from 2000-2008.

[Master of Ossus]

It does look irresponsible, until you realize that Bush was doing it during a period of high economic growth when he really didn't need to (and in fact, he should have tried to cool off the overheating economy to prevent just this sort of correction), whereas Obama believes he doesn't really have any choice at this point.

The whole point of Mankiw's statement is that Obama's economic model is worse than Bush's, with this respect, during good times as well as bad.

[Jalinth]

Point noted. Although which part of Obama's economic policy is going to cause the budget deficit to begin with?

It isn't necessarily just Obama's policy. It is the cumulative policy of US governments over time has created a structural deficit. I'm being a bit picky here since it isn't any one policy that is the problem, it is all of the policies together. To cure a structural deficit, a government needs to reduce costs, increase revenue, or a combination. The US does have another option which most countries don't. If they can cover their spending excluding interest with revenue, then they can effectively "wipe out" their outstanding debt (which is mostly denominated in $USD) by just printing dollars. Needless to say, the consequences would be that price inflation would spike upwards unbelievably. So a meal at MacDonald's might cost $100.

[J]

I'm curious what everyone has to say about this - I haven't bothered chasing down his links, since I haven't time, but Mankiw is on the whole trustworthy; if he's reading this right, then Obama is actually going to run growth deficits higher than Bush. That's pretty irresponsible.

Personally I think Mankiw is optimistic, however, I can't argue with the analysis he's carried out with his data and basic assumptions of the current government's projections. He notes those assumptions are optimistic and with that I agree.


My personal estimates are a heck of a lot worse, but you probably knew that already. I think we're looking at $2 trillion deficits until the end of Obama's term or until the bond market cries "no mas!", whichever comes first. If the latter happens it's going to ramp interest rates and increase the nation's debt service charge by several multiples, which of course has to come out of the federal budget. So when we finally do get back to growth we could easily see half the budget going towards debt service and unless drastic cuts are made in the rest of the budget, GWB sized deficits will be fondly remembered in the future.

There are of course a lot of things which could skew my estimates off either way, for instance if the bond market dislocates tomorrow and puts an end to the deficit spending then my guess will be way too high, on the other hand if Treasury fires up the presses adopts the Zimbabwe model, well, I don't want to go there. And of course there's always the outside chance of aliens giving us the secret to cold fusion using household items. Or the Yellowstone caldera going kablooie.

[Darth Wong]

It does look irresponsible, until you realize that Bush was doing it during a period of high economic growth when he really didn't need to (and in fact, he should have tried to cool off the overheating economy to prevent just this sort of correction), whereas Obama believes he doesn't really have any choice at this point.

The whole point of Mankiw's statement is that Obama's economic model is worse than Bush's, with this respect, during good times as well as bad.

Yeah, based on projections for 2014. I don't see how anyone can take budget projections for 2014 seriously at this point. Way too many unknowns, and you really have no idea whether they're being hopelessly optimistic in order to make people happy or deliberately pessimistic so that people will be pleased if they come in better than expected as the years go by.