Stop celebrating our falling deficits

May 22, 2013

It's time to stop celebrating last week's Congressional Budget Office report. Our deficits aren't dropping because we're doing something right. They're dropping because we're doing everything wrong.

My initial piece on the CBO report led with the surprising news that the agency had knocked more than $600 billion off its projections for the deficit over the next decade. But as I wrote then, the deficit is following a weird path. It's not a gradual decline. It's not a temporary uptick as we spend to create jobs followed by a sharper decline as the economy recovers. It's a sharp decline followed by a gradual rise -- it looks a bit like a Nike Swoosh.

That's a disaster.

Let's stop talking about the deficit for a minute and simply talk about the demand the government creates for goods and services. The CBO is saying that the federal government will be pulling demand out of the economy in 2013, 2014 and 2015. It will then start adding demand back in again -- meaning we'll be increasing the deficit -- from 2016 through 2023, and presumably beyond.

That is literally the opposite of what we should want. Textbook economics says the government should add demand when the economy is weak and pull back when the economy is strong. The economy -- and particularly the labor market -- will remain weaker than we'd like in 2013, 2014 and 2015. That's when the government should be helping, or at least making sure not to hurt too fast. It should be much stronger from 2016 to 2023. That's when the government should be backing off.

The types of policies matter, too. We want to cut the deficit by reducing spending on programs that don't add much to the economy and raising taxes on people who can afford it. Instead, a lot of our deficit reduction is coming through sequestration, which everyone agrees is pretty much insane, and which focuses on the part of the budget that isn't growing. Basically none of the savings are coming through entitlement reforms that will grow in the second or third decades, or through tax reforms.

It's as if we took all the good ideas people had to help the economy and reduce the deficit and did the opposite. But because Washington myopically focuses on the number that denotes the deficit rather than the policies behind it or how well it matches the likely path of the economy, many in town are celebrating the report and declaring their work pretty much done, at least for now.

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Brad Plumer · May 22, 2013