Reason #269: What Deficit?

While trawling Ezra Klein's Wonkblog this morning for the latest fiscal-cliff news (and, well, searching for today's blog topic), I came across two interesting op-eds; one by Evan Soltas at Bloomberg, and one by Paul Krugman at the New York Times, whose work I've highlighted here before.

Both pieces, to paraphrase, basically serve to point out the fact that there really is no federal debt crisis to speak of.

Sure, both men acknowledge that the actual debt is in fact roughly 1 trillion dollars at present. For starters, though, Soltas divides the debt into two categories: actual and structural debt. Actual debt is self-explanatory; structural debt is things like social security--areas where, yes, there is excess spending, but it's predictable, and baked into the core of our economy. Social security, for example, is a demographic problem due to the aging of the population, and can neither be made worse by a slow economy nor fixed by a strong one.

The actual debt, meanwhile, is shown by Soltas' figures to fluctuate a great deal based on the health of the economy. Per Krugman's piece, when we go into a recession, GDP goes down, which means the government is taking in less tax money at the same time as it's giving temporary tax breaks to low-income citizens and spending more on welfare and food stamps.

The key word there, however, is temporary. When the economy picks back up, not only is there more tax money to go around, but spending on recession-related measures goes down by definition, and the whole thing evens out--which is what led to the budget surpluses at the end of the Clinton years.

The other point Krugman makes, which hearkens back to the old post I linked to above, is that debt is not inherently evil; it's both normal and sustainable as long as the proportion of debt to GDP is managed effectively--and if you look at the light blue and grey lines on the graph above, you'll see that the last sixty years have done a fairly good job of that. The vast majority of the current trillion-dollar deficit--the dark-blue spike at the far right--is recession-related, and thus, the best way to ensure that it will go away isn't to chop federal spending off at the knees, it's to make the recession go away.

In other words: stimulus. Happy New Year!


Further Reading

The Deficit: Not as Bad as They Want You to Think

That Terrible Trillion