A Pretty Good but Not Excellent Story from David Leonhardt on the Deficit

David writes:>Economic Scene – How the U.S. Surplus Became a Deficit: There are two basic truths about the enormous deficits that the federal government will run in the coming years. The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested. The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.>Mr. Obama — responding to recent signs of skittishness among those lenders — met with 40 members of Congress at the White House on Tuesday and called for the re-enactment of pay-as-you-go rules, requiring Congress to pay for any new programs it passes. The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years…There are two things wrong with the story. First, David doesn’t say what part of the $1.2 trillion deficit is a problem. My estimate is that the U.S. could run a $500 billion annual deficit in an average year without incurring any chance of getting into any serious economic problems (although I would wish that the cyclically-adjusted deficit were smaller), and that an additional $400 billion of annual deficit is justified by the recessionary state of the business cycle over Obama’s first term. So the serious deficit problem seems to me to be, today, at $300 billion a year.Of course, it will grow unless taxes are raised by 2012 or health-care costs contained…Second, this “[the deficit] could end up doing serious economic damage if foreign lenders become unwilling to finance it…” needs to be balanced by the observation that a worry that foreigners will prove unwilling to buy U.S. Treasury bonds at reasonable prices is, like, worry #927 on our list of worries. It’s just not up there…

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