Is Phillip Swagel Looking at the Same Numbers as the Rest of Us?

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Thursday, 05 September 2013 05:08

That's what readers of the NYT's Economix blog must be asking. Swagel used his column today to complain:

"The improvement in the budget outlook for this year and the next several has empowered the fiscal 'ostrich caucus,' but does not change the reality of a 'severe long-run fiscal imbalance.' President Obama has spoken about the need to take on the long-term fiscal challenge. But this requires making difficult choices to address the funding gaps in Social Security and Medicare, and on this Mr. Obama has flinched, setting aside the recommendations of his own Bowles-Simpson fiscal commission and instead putting forward only modest entitlement reform proposals — enough for a talking point but by far not addressing the imbalances. Indeed, in his 2013 State of the Union address, Mr. Obama spoke merely of 'the need for modest reforms' in Medicare, when the decisions will be wrenching, not modest, since ultimately they will involve how to allocate health care resources for people in the final year of life when costs, ethics and human dignity crowd around the beeping hospital equipment."

The most recent projections from the Congressional Budget Office show that the debt to GDP ratio will actually be lower in 2023 than it is at present. The deficit projected for 2023 is just 3.5 percent of GDP, a deficit that implies only a modest increase in the debt to GDP ratio in that year. The need for "wrenching" decisions is not apparent in these projections.

It is worth noting that projections for future deficits have fallen sharply in the last few years, partly due to the budget cuts and tax increases that have been put in place, and partly due to a slower rate of projected health care cost growth, which is the main driver of long-term deficits. In fact, the projected debt for 2023 is now lower than the target set by Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission. (Swagel mistakenly refers to recommendations from the Bowles-Simpson commission. The commission did not get the necessary majority to make recommendations. The recommendations were those of the co-chairs, not the commission.)

The other point that should be mentioned in any discussion of the deficit is that the cause of large deficits is the economic downturn that followed the collapse of the housing bubble. Prior to the bubble's collapse the deficits were modest and the debt to GDP ratio was falling. Deficits were projected to remain small well into the current decade.

The larger deficits of the last five years have supported the economy, boosting growth and creating jobs. Since the private sector is not creating demand, there is no alternative to demand generated by the public sector. Smaller deficits mean less growth and fewer jobs.

Unless the dollar falls in value against other currencies, thereby reducing the trade deficit, it will be necessary to run large budget deficits to sustain demand. That story is pretty much dictated by accounting identities, unless the goal is to spur a wave of demand driven by another bubble.