Which Of These Trends Bothers You More?

March 14th, 2013 at 3:32 pm

Here’s a simple graph I just made for a presentation this weekend that plots the deficit/GDP ratio and the unemployment rate (CBO data; fiscal years; 2013 forward are forecasts).


Unemployment’s stuck at an elevated rate, and expected to stay there (these forecasts assume the sequester sticks, which I fear is correct).  The budget deficit, on the other hand, is coming down, not because of great fiscal rectitude, grand bargains, or Ryan-esque intense austerity, btw, but because the worst of the recession’s in the rear view mirror and the economy is slowly—too slowly—climbing back.  Still, while you can see the recovery in the declining deficit-to-GDP trend, you’ve gotta squint awfully hard to see it in the unemployment rate.

But wait, you say!  Your graph ends right before CBO predicts that the deficit ratio will begin to climb again.  True dat—according to CBO, the deficit/GDP ratio hits about 3% in 2019 and keeps climbing.  That’s not good—I’m on record as a CDSH (cyclical dove, structural hawk):

…I think the best position is to be a Cyclical Dove and a Structural Hawk (CDSH). If you’re a CDSH, your fiscal question in recessions and sloggy periods like the US (and much of Europe) are experiencing today is this: “is our budget deficit large enough to offset the demand contraction from the private sector?”

When strong private sector growth is back, the CDSH asks “now that we’re back to robust growth, are our revenues and spending lined up such that the debt we built up during the down economy will soon start to recede?” That is, deficits and debt that grow in full employment economies are called “structural” budget deficits as distinct from cyclical ones. They’re to be avoided.

How to do that?  As Richard Kogan shows here, we need another $1.5 trillion in deficit reduction over the next decade to stabilize the debt.  Splitting that between spending cuts and tax increases wouldn’t be a heavy lift for a functional Congress.

If you see one around, call me immediately.

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6 comments in reply to "Which Of These Trends Bothers You More?"

  1. rjs says:

    Which Of These Trends Bothers You Most?

    the deficit-to-GDP trend; it should not be declining when the private sector is deleveraging; attempting to control the deficit under such circumstances is what has been costing us this prolonged & deep recession…

  2. jo6pac says:

    It’over for us in Main Street and on SS even 0 will signon to this. The regups will the blame 0 will get the rewards of ws.

  3. Postictal says:

    The use of Tru-dat is what I find disturbing!

  4. Richard M. Mathews says:

    I’ve got a really wonkish thought on this. While this graph is very useful, it still is not showing the right thing. It should not be showing deficit over GDP, which is the same as d/dt(debt)/GDP. It should be showing d/dt(debt/GDP). That is the measure that really matters. That grew even worse at the peak of the crisis, and that is recovering even more than you show — all the way to a budget in primary balance. For those wanting this explained without calculus, it is what Dr. Krugman discussed here:

    And rjs, you are absolutely right. These curves need to be reversed.