Deficit Reduction: It’s Not the Economy, Stupid
For the past three years, Washington policymakers have been fixated on reducing budget deficits. And currently, short- and medium-term deficit projections have plummeted, due both to changes in legislation as well as revisions due to technical factors. In May, for example, the Congressional Budget Office revised the deficit projections that it had released in February, reducing its fiscal year 2013 deficit projection by 24 percent, or $200 billion. Similarly large reductions apply in each subsequent year, reducing the ten-year cumulative deficit estimate by $618 billion. As a consequence of smaller deficit projections, the CBO anticipates that the federal debt held by the public will be 73.6 percent of GDP by 2023—1.5 percentage points less than it is this year, and more than four percentage points less than CBO’s previous forecast for 2023.
Both the revised longer-term outlook and the unexpectedly rapid reduction in the near-term deficit have prompted some to change their tone on the urgency of further deficit reduction. Earlier this week, the Center for American Progress brought together a panel of experts to discuss the shifted outlook and what it means for debt-reduction policies in the current climate.
Twice during this discussion, panelist Bob Bixby of the Concord Coalition attributed the progress on deficit reduction to improvements in the economy, saying “A lot of the short-term decrease in the deficit has come from the economy recovering.”
This is simply not accurate.
Economic recovery was not responsible for the revised deficit trajectory. On the contrary, the primary drivers of short-term deficit reduction have been deliberate policy choices. Key among these is the sequester, the set of across-the-board spending cuts of $85 billion which, all of the panelists agreed, can be expected to damage the fragile progress we’ve made toward economic recovery.
And in the medium term, smaller deficit projections reflect a slowdown in healthcare cost growth. That slowdown is not a product of economic recovery: in fact, none of the revisions that CBO released in May were due to changed economic conditions or new legislation, but were instead classified as technical changes. Only 15 percent of the improved outlook was due greater-than-expected revenues, mainly from income taxes on high-income individuals and corporations. But the vast majority of that reduction (85 percent) was due to lower projections of government costs for Medicare, Medicaid, and Social Security.
And what economic recovery was Mr. Bixby referring to, exactly? Five years after the Great Recession, the U.S. has an output gap of 5.6 percent of GDP and a jobs gap of 8.8 million. The economy grew at the tepid annualized pace of 1.7 percent in the second quarter of this year. As our colleague Andrew Fieldhouse points out, the weak expansion we’ve experienced has been insufficient to induce a full economic recovery.
The claim that “recovery” is responsible for improved deficit outlook is not only incorrect, but dangerously misleading. The campaign to reduce the deficit before economic recovery took hold has pushed lawmakers to espouse an “economically damaging amount of austerity,” as panel moderator David Leonhardt put it. When the economy has truly recovered—that is, when conditions have improved appreciably for average working Americans, and the economy is producing at its potential—then it will, indeed, be time to examine the so-called structural deficit. But that time has certainly not arrived.
Faced with the new realities of smaller deficits, stifling austerity measures and slow growth, what explains the continued push for deficit reduction? As panelist Jared Bernstein pointed out, some deficit-reduction advocates harbor an ulterior motive—a motive that has little to do with the deficit itself. Many are individuals and organizations that simply want to see the federal government shrink in size, and have found that “deficit fear-mongering” serves this goal. Preaching the prospect of fiscal doom forces legislators to address the deficit, which some hope will be done by slashing entitlement spending. In the meanwhile, the economy continues to suffer.
Center for American Progress President Neera Tanden underscored the false dilemma that has poisoned policy discussions for the past three years. The choice we face is not between spending now and suffering in the future, or curbing today’s spending in order to “save” for the future. Rather, by making smart public investments now—investing in infrastructure and education, for example—we could both put Americans back to work today and ensure a growing economy. And that makes it easier to repay our debts in the future: strong economic growth naturally shrinks the debt-to-GDP ratio because it increases GDP.