The incredible shrinking deficit

Cardiff Garcia sends us this cool deficit reduction chart:

If you like your numbers raw, then there's this,

"In dollar terms, the Congressional Budget Office estimates for the July fiscal balance (which will be released next week) suggest that the deficit totaled $722bn in the 12 months ending in July, down from a peak of $1.471trn in December 2009; we now expect the deficit to total $650bn in FY 13 and $550bn in FY14".

Plenty of people are lamenting this show of "austerity" with unemployment still high.

If  we had been better Keynesians in the past, we would have used the "boom and not the bust" for "austerity", and could have run an expansionary policy longer. But in the absence of a proven connection between fiscal stimulus and sustainable job growth (sorry Brad and Larry), and the presence of our high and still rising debt levels and the continual damaging political theatre around debt ceiling breaches, I am fine with this rate of deficit reduction.

What is not so great about the deficit reduction we are getting is that it doesn't address longer run budget issues, and the deficit is projected to start rising again in 2015 and get ugly shortly thereafter.

I'm happy we've reduced war spending and cut the military (at least as a % of GDP). We can do that some more. But I don't see any achievable solution to our long run deficit drivers. People we can't even get chained CPI as the benchmark for social security increases. That was treated like running over grandma with a reindeer.

The good side to me is that our government actually "worked". Politicians saw the huge deficits as a problem and enacted policies to reduce them (at least for a while). The bad side is that the policy process burned tons of trust and political capital without addressing our real, long-run budget problems.

Robert knows best

Robert Frank's latest NY Times piece is amazing in its incredibly low ratio of facts to opinion.

When do low tax rates hurt the rich? When Bob Frank says so, buddy.

Let's break down some of the questionable and unsubstantiated claims.

First is the axiom that money buys national political outcomes. That rich donors have bought low tax rates and deregulation. Frank cannot conceive of the idea that low tax rates and deregulation might actually be popular policies with a wide swath of the population! Nor does he present any evidence that money buys outcomes. Perhaps that's because there is little to no evidence that it does.

Next is the bizarre idea that budget deficits reduce the "quantity and quality of public services". Actually, given a level of revenue, budget deficits INCREASE the quantity of public services above what could be purchased without the deficit.  Budget deficits are the buffer that keep government purchases from falling one to one with declines in revenue.

Now consider Frank's notion that taxes on the wealthy are currently so low that we cannot have paved roads and safe bridges. In FY 2012, we spent $287 billion on transportation (Federal State and Local combined). Total government spending is running over $5.6 trillion dollars in 2012.  There is plenty of money for basic public services and infrastructure. At current tax levels, the rich can have their Bentleys and paved roads to drive them on. It's hard to believe that the rich are both so powerful they can dictate their tax rates but so un-powerful that they can't influence where the money is spent.

There's much more, but I'll leave that for you people.

Health Care Costs

I have a number of colleagues who think that anyone who worries about the increased cost of health care under the new bill is either an idiot, or an ideologue.

Many of them believe, however, that anything the CBO says, or that is printed in the NYTimes, has credibility.

So, here is a past head of the CBO, writing in the NYTimes.

Excerpt:

ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line.

Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?

The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

You can argue, if you want, about quality, and the advantages of more complete coverage. I may not agree, but at least those points are arguable. But you can't seriously believe that this health care bill is anything but a giant cost boondoggle, creating deficits that will affect us for the rest of our lives. This is not the sort of legacy I wanted to leave my children. "We couldn't solve the problem, and so we just charged it all on credit cards!"

UPDATE: Some interesting numbers (thanks to Angry Alex)

Joe Stiglitz is a funny dude

He says we shouldn't worry about the deficit because of all the valuable assets we are acquiring by spending the money!

Here, check it out:

"Most economists also agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets. This should help answer those financial sector hawks who are raising alarms about government spending. After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits."

Sweet fancy Moses! Shall we count our valuable investments? The wars in Iraq and Afghanistan? Entitlement spending? Farm subsidies? Putting billions into acquiring failing companies?

Hey Joe! We are not running over a trillion dollar deficit because the Federal government is making big investments in education and technology. 

And by all means, let's focus on the national debt and not on the current deficit. Didn't it just double under the last President and isn't it slated to almost double again under the current one?

My, what amazing valuable assets we must have built up with that spending binge. 

Now he does go on to discuss how the business cycle affects the deficit and to opine that it is too soon in the recovery to consider spending cuts or tax increases for short term deficit reduction, which is perhaps a defensible point of view.  

But why oh why oh why do so many excellent economists turn off their brains when they address the public?