March 30, 2006
The Full Employment Budget Surplus
The CBO's latest estimates
It is reputed that President Bush asserted that the budget deficits occured because nobody ever planned for tax cuts, war and recession to occur simultaneously. To my knowledge, nobody has ever been able to verify this quote, although President Bush lays blame on the recession in this 2004 press conference (some two and half years after the recession's end). But in any case, it is beside the point. The CBO has published its graph of the cyclically adjusted standardized budget balance. We are now long past the recession, yet the cyclically adjusted budget deficit remains large as a proportion of GDP, and is projected to start to shrink partly because of the "current law" assumptions CBO is required to incorporate by statute.
Source: CBO, The Cyclically Adjusted and Standardized Budget Measures, March 2006.
So the President has a point. Instead of a swing of 6 percentage points of GDP from peak to trough in the budget balance -- as implied by the unadjusted standardized budget balance -- the full employment budget balance has shifted by only(!) about 4.5 percentage points. (Although, as outgoing CBO director Holtz-Eakin said, these are the "good ol' days" as far as entitlements are concerned. Watch out for Medicare D!)
On a related note, CBO's recently released An Analysis of the President's Budgetary Proposals for Fiscal Year 2007 (March 2006) has an interesting graph on page 3, showing that even with the Administration's optimistic forecasts on spending cuts, the deficit begins to deteriorate again in FY 2011.
Posted by Menzie Chinn at March 30, 2006 02:53 PMdigg this | reddit
The federal budget problems grow beyond belief after 2012 unless the social programs are torn apart.
Medicare and Medicaid costs will shock many inexperienced people who will be conducting budgetary analysis in six years.
Posted by: Movie Guy at March 30, 2006 07:54 PM
I don't know. In my view both Republicans and Democrats have a problem: they're both longing for things to return to normal i.e. to the way things were in the mid to late 90's. The problem with using this as a strategy is that the 90's were an anomaly. Investment in technology over a protracted period (1983 to 2000) finally started paying off in the 90's. There are lots of business magazine articles from the late 80's and early 90's complaining that all the investment in PC technology hadn't paid off.
Well it did pay off and we've been reaping the benefits for the last ten years in the form of economic growth and productivity increases. But business is resting on its laurels; the level of investment hasn't continued.
I don't believe that 90's-style economic growth is going to save the U. S. budget for either the Republicans or the Democrats. We'll need to go back to the old-fashioned way of controlling the deficit through tax increases and/or real budget cuts. Or completely reorganizing our health care system, as Movie Guy points out, although I have no real hope of that taking place until after the disaster has already happened.
Posted by: Dave Schuler at March 31, 2006 07:48 AM
About that quote, then-OMB director Mitch Daniels claimed that Bush had said this in Oct. 2001:
He had always listed, throughout his campaign and since, the reasons why the nation might depart from this policy, reasons he had given as acceptable for running fiscal deficits: for war, recession, or emergency. As he said to me in mid-September, "Lucky me. I hit the trifecta."
And it is quite likely, now, that in fiscal ï¿½02 we may run a deficit, very modest by comparison to those of the past, possibly something in the two digits. This will depend on whether a stimulus package -- and I will say a little about that in a minute -- is passed, and at what size. But this would not be a startling thing.
Of course, Daniels was lying that Bush had listed those as reasons for running a deficit; Bush never said anything of the sort during the campaign. Nor did he say anything of the sort after the election, as he and his team were busy claiming that a recession was imminent (and Clinton's fault) while pushing through tax cuts, which they refused to acknowledge could lead to deficits.
Posted by: Matt Weiner at March 31, 2006 09:05 PM
The campaign "trifecta" remark was apparently claimed (falsely, so far as I know) by Bush at
whitehouse.gov, May 2002 in his
"Remarks by the President at Taft for Governor Luncheon"
(link and discussion at spinsanity.org.) I don't see that it's very important, but the President did say that he'd said it.
You know, when I was running for President, in Chicago, somebody said,
would you ever have deficit spending? I said, only if we were at war,
or only if we had a recession, or only if we had a national emergency.
Never did I dream we'd get the trifecta. (Laughter.) But that's what
Posted by: Tom Myers at April 18, 2006 10:47 AM
So the President has a point. Instead of a swing of 6 percentage points of GDP from peak to trough in the budget balance — as implied by the unadjusted standardized budget balance — the full employment budget balance has shifted by only(!) about 4.5 percentage points. (Although, as outgoing CBO director Holtz-Eakin said, these are the “good ol’ days” as far as entitlements are concerned. Watch out for Medicare D!)
Posted by: Thomas at November 14, 2006 02:51 AM