Excerpt
"Yes, we do have a trillion-dollar deficit. But a large part of that deficit is attributable to the depressed economy. Reasonable estimates say that we have an output gap of something like $900 billion a year — yes, some would dispute that, but it’s the estimate I find most convincing. This automatically raises the budget deficit by depressing revenue and leading to more spending on unemployment insurance and means-tested programs like Medicaid — the CBO doesn’t offer a simple ratio on this, but a survey of their estimates suggests that we’re probably looking at $300 billion or more in automatic stabilizers here. Then you need to add in non-automatic but nonetheless cyclically-determined things like extended unemployment benefits and the temporary payroll tax cut. The point is that economic recovery would shrink the budget deficit a lot — almost surely more than $400 billion.
Meanwhile, zero is not the crucial number for the deficit; a much better criterion is the budget balance that would, on a sustained basis, stabilize debt as a percentage of GDP. Now, debt is currently slightly over 70 percent of GDP; with 2 percent growth and 2 percent inflation, that means that a deficit of almost 3 percent of GDP, say $450 billion, is consistent with a stable debt ratio."
http://krugman.blogs.nytimes.com/
Very helpful to see the numbers.
Looks to me as if the folks in DC are focused on the wrong problem. The problem is to get the economy growing again. Current deficits are a side issue that will be dealt with via economic recovery.
That is occurring gradually. But it can be speeded up with a little more stimulus spending. Ideally, they would spend on the sort of infrastructure assets which pay for themselves over time.
In the olden days, folks from the right thought stimulating an economy was a good idea during a recession. But they seem to forget this when there's a Democratic president.
| 