11/06/2004

To Deficit - or Not To Deficit? (Don't believe everything you hear):

One of the biggest Bush-bashers during the 2004 Presidential Campaign was the "Huge Deficits" that Pres Dubya recklessly ran up, right? Not!

Drops in revenues and increases in outlays occur automatically during a cyclical downturn and then reverse themselves during a cyclical upturn. There is also a "cyclically adjusted deficit". The cyclically adjusted surplus or deficit is calculated to show the underlying outcome of the federal budget when those automatic movements are removed.

Policy actions by the Congress and the President, such as tax or spending legislation, create changes in the total budget surplus or deficit that are distinct from the automatic cyclical movements. The cyclically adjusted surplus or deficit includes the effects of those legislated changes.

The CBO calculates a different measure, the standardized-budget surplus or deficit, that attempts to remove those factors as well as the effects of the business cycle. As a result, the standardized-budget surplus or deficit is the more speculative. That is the one the Democrats were screaming about, trying to scare the pants off the average American, who really doesn't know much about economics.

Calculations of cyclically adjusted budget measures attempt to remove the effects of the business cycle on revenues and outlays (that is, the cyclical part of the budget). For example, cyclically adjusted revenues exclude the loss of revenues that automatically occurs during recessions. Likewise, cyclically adjusted outlays exclude the additional spending that follows automatically from a rise in unemployment. The difference between those two measures is the cyclically adjusted surplus or deficit.

CBO estimates that the cyclically adjusted deficit will increase from 2.6 percent of potential GDP in 2003 to 3.2 percent in 2004 and then decrease to 2.8 percent in 2005 --an increase of 0.2 percent. A good look at the chart of the Cyclically adjusted deficit below shows that we are quite clearly well within the historical range, and given the fact that we are still emerging from the nasty stock market bubble and recession that Dubya inherited, along with the effects of 9/11, it isn't reckless at all.


CBO Cyclically Adjusted Deficit Chart
CBO Historical Chart of Adjusted Surplus/Deficit