Paul Krugman: The Dwindling Deficit

Paul Krugman: The Dwindling Deficit

Posted in the Minneapolis Forum


Minneapolis, MN

#1 Jan 19, 2013
Itís hard to turn on your TV or read an editorial page these days without encountering someone declaring, with an air of great seriousness, that excessive spending and the resulting budget deficit is our biggest problem. Such declarations are rarely accompanied by any argument about why we should believe this; itís supposed to be part of what everyone knows.

This is, however, a case in which what everyone knows just ainít so. The budget deficit isnít our biggest problem, by a long shot. Furthermore, itís a problem that is already, to a large degree, solved. The medium-term budget outlook isnít great, but itís not terrible either ó and the long-term outlook gets much more attention than it should.

Itís true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy ó and youíre actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers: Revenue will rise while some categories of spending, such as unemployment benefits, will fall. Indeed, thatís already happening.(And similar things are happening at the state and local levels ó for example, California appears to be back in budget surplus.)

Still, will economic recovery be enough to stabilize the fiscal outlook? The answer is, pretty much.

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isnít great but isnít terrible: It projects that the ratio of debt to G.D.P., the standard measure of Americaís debt position, will be only modestly higher in 2022 than it is now.

The center calls for another $1.4 trillion in deficit reduction, which would completely stabilize the debt ratio; President Obama has called for roughly the same amount. Even without such actions, however, the budget outlook for the next 10 years doesnít look at all alarming.

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