Plain Sense Economics

Robert Frank, Cornell economist and co-author of the principles textbook that we use in class, wrote in the New York Times this past Sunday:

The consensus is that short-run deficits help end recessions, and that whether long-run deficits matter depends entirely on how government spends the borrowed money. If failure to borrow meant forgoing productive investments, bigger long-run deficits would actually be better than smaller ones.

A good accompanying read is the Congressional Budget Office’s preliminary estimate of the impact of President Obama’s proposed budget. (CBO was organized in 1974, to give members of Congress an independent, non-partisan ability to project budgets and their impacts. Previously Congress had to rely on estimates provided by the Executive Branch.) The CBO’s director has started a blog, and this post nicely summarizes the CBO estimates:

As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.

CBO’s projections of future deficits are higher than those coming from the Administration. The differences are greater than rounding error, and point to the importance of having a separate group crunching the numbers.

The greater question, however, is whether this ballooning Federal deficit is good policy or not. Now back to Robert Frank’s comments. As he points out, there is a kind of quiet consensus that, in the short term, we must endure significant Federal deficits as we try to stimulate demand and climb out of the recession. The greater debate is whether the additional costs proposed by the Administration – that go beyond short term stimuli – are good investments. I happen to think so (in general – more details to learn) and there’s no question that Congress will do more than tinker with the plan. Even so, the deficit estimates are sobering.