Krugman et al: Close the Argument by Addressing CBO’s Alternative Budget Path

December 30th, 2012 at 6:46 pm

Paul Krugman and a host of others are making important and highly salutary points about budget deficit hysteria.  Policy makers should listen to them.  However, unless I’ve missed it, these critics have neglected to tackle a key part of this: why the CBO’s alternative baseline showing persistent structural deficits, is wrong.  I fear that policy makers won’t listen to them anyway, but given the CBOs stature in these debates here in DC, I guarantee Krugman et al will be ignored unless they tackle this question (which isn’t hard to do).  Believe me, “CBO says current policy will generate structural deficits” is a lot more convincing to the “serious people” around here than pretty much anything else.

As the figure below reveals, under this alternative scenario, the budget never achieves primary balance (deficit/GDP<3%) even as the economy is assumed to enter a normal growth path, i.e., structural budget deficits persist.  What’s in this scenario?  Full extension of the Bush tax cuts, AMT patch, doc fix, no sequester…all of which lead to higher deficits.

Obviously, that doesn’t prove the anti-hysteria crowd–of which I’m a card-carrying member–wrong.  But they/we need to point out why the alternative scenario is wrong.  Which of its policy assumptions are incorrect?  How would they change them, and no hand waving allowed (I like to note, in this regard, that the Obama 2013 budget achieves primary balance by 2016, and during the cliff negotiations he’s largely been arguing for that policy set)?  Does the CBO assume slower GDP growth than they do?

Like I said, closing the argument by addressing this part of it may well not move many policy makers.  Their motivation for deficit hysteria is not fiscal rectitude—it’s bashing and shrinking government.  But for those who speak the lingua franca of DC and CBO, it’s a critical piece of all this.

 

Source: CBO August Update

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3 comments in reply to "Krugman et al: Close the Argument by Addressing CBO’s Alternative Budget Path"

  1. PJR says:

    Thanks so much for the parenthetical reference to Obama’s 2013 budget proposal. He’s offered budget proposals every year, and the GOP pretends that they don’t exist. Furthermore, I believe that Obama’s proposals regarding income taxes haven’t changed since September 2008. He once emphasized the importance of “persistence” but people don’t seem to notice it.


  2. readerOfTeaLeaves says:

    For someone like myself, outside the Beltway, this is quite interesting to read:

    Believe me, “CBO says current policy will generate structural deficits” is a lot more convincing to the “serious people” around here than pretty much anything else.

    It’s clear that this notion would help rationalize (though not excuse) the kind of extremism and extortionate political behavior we are seeing in DC. Nevertheless, it appears completely illogical as an economic proposition.

    Is this belief about ‘structural deficits’ held by the same people who didn’t see the 2008 Meltdown coming? Who believed that deregulation was a great idea because markets are always efficient and would always ‘self-correct’? Who claimed we could put wars on the federal credit?

    Is this yet another behemoth among the Really, Dreadfully Bogus and Misbegotten Economic Fantasies under which we have languished in recent decades? And is it espoused by people with low track records for economic credibility?

    If the ‘structural deficits’ brouhaha is mostly fiction, how do we begin to unpack it in simple, easy-to-follow terms?

    Because exposing bad ideas as fraudulent is one of life’s most enjoyable activities, I hope that OTE-ers have a ton of fun unpacking this ‘structural deficits’ mess ;-)


  3. Larry Signor says:

    Please, enough with the macro bs. Healthcare is the truck about to run US over, don’t worry about the bird pooping on our heads. GDP growth will never exceed the growth in healthcare costs until we devise a saner more humane healthcare system. When did models replace common sense and new math?


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