Evidence

03.22.13

WBI: More on the Chicken-and-Egg Deficit-and-Jobs Issue

I think I'm going to start labeling certain posts WBI, for Wonky But Important. I'll try to make these posts relatively brief, but they'll all elucidate a policy point that I think we all should know in order to have an intelligent conversation.

Our first WBI is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen--my very own Mongtomery County Md. representative, I am happy to say--finding that half of this year's expected budget deficit of around $800 billion--half!--can be laid at the door of the struggling economy.

In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures--there's no need for stimulus spending or lots of unemployment benefits during a humming economy). They measure this in terms of what they call "automatic stabilizers"--the reductions in revenues and increases in outlays that are the result of the weak economy.

So, the CBO writes:

According to CBO’s projections under current law, the contribution of automatic stabilizers to the federal budget deficit, measured as a share of potential GDP, will rise slightly in fiscal year 2013, to 2.5 percent. That contribution accounts for about half of the estimated deficit this year. The contribution will remain at 2.5 percent of potential GDP in 2014, accounting for roughly three-quarters of the projected deficit next year.

CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1; the expiration of the payroll tax cut that was in place in 2011 and 2012; and the increase in tax rates on income above certain thresholds starting in 2013.

Can't get much clearer than that. Austerity. Increases. The. Deficit. Asuterity. Increases. The. Deficit.

This relates to and supports the post I wrote Tuesday about that poll showing a horrifying percentage of Americans thinking balanced budgets lead to jobs. No. It's the other way around. Now you have the CBO saying it, not just me. The Democrats, as van Hollen made clear at this breakfast I attended at Third Way, are banking on people to grasp this. I hope so.

You'd think that the citizenry, when confronted with one party talking about jobs and another party talking about a balanced budget, and asked to name which of those parties stood for jobs, would choose the one talking about jobs instead of the one talking about a balanced budget. But you never know. The phrase "balanced budget" just sets off so many positive associations in most people's minds. If only more people read CBO reports. Or this blog!