Obama's Deficit?

Nobel prize winning economist Paul Krugman explains that the huge current federal budget deficits are entirely an effect of the depressed economy caused by the 2008 financial crisis and its aftermath. Krugman sraightforwardly shows that there are a couple of fundamental factors driving the deficit. The most significant is that federal revenues are running $800 billion per year below what they would otherwise be in a non-depressed economy. Also important is that federal outlays on things such as food stamps and unemployment compensation are about $300 billion higher than they would be in a non-depressed economy. Those two factors alone account for $1.1 trillion per year in budget deficit! You don't have to be an economist or a budget expert to grasp how this constitutes a stranglehold on the U.S. fiscal picture. All you need to know is that, because of the depressed economy, there are 10 million or so people who are unemployed who would otherwise be working and paying taxes (revenue) and not receiving benefits (outlays). It really is that simple.

In the spring of 2009 the Congress passed, with only three Republicans voting in favor*, a stimulus bill that the nonpartisan Congressional Budget Office credits with saving or creating 1 to 3 million jobs. Many economists outside of government agree with that assessment. Many economists also agree that the stimulus wasn't nearly large enough relative to the size of the problem, and that more should have been and still should be done. The current political climate makes it impossible to imagine how that might be accomplished. And so we continue to slog through a miserable swamp of economic malaise, high unemployment, and high deficits.

*Correction: A previous version of this post incorrectly stated that no Republicans voted for the stimulus bill. While it is true that no House Republicans voted in favor, three Senate Republicans—Susan Collins, Olympia Snowe, and Arlen Specter—voted for the bill. That's three Republican votes out of 535 total members of Congress.

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Update Nov 1 2012: Economist Dean Baker explains that the deficit hysteria you've heard all these years is bogus; that the current high deficits are a result of the weak economy caused by the collapse of the housing bubble; and that the current high deficits are providing crucial support for the economy. See in particular the discussion near the end of his post.

Copyright (C) 2012 James Michael Brennan, All Rights Reserved