Big money term of the week: "structural deficit"

photo by fatcontroller

Ok, so this week we had big economic news: the Congressional Budget Office (CBO) predicted that the federal deficit will hit $1.35 trillion in 2010. Politicians love these kinds of numbers even more than journalists, because they have little intelligible meaning to anyone outside of government, and are therefore clay in the hands of anyone wanting to demonstrate their enemy's incompetence at fiscal responsibility and their own business savvy.

So, naturally, President Obama is expected to announce a discretionary spending freeze tonight to prove he's on top of the situation. And Republicans are saying that the freeze isn't enough, and that the President's rash bailouts have plunged us into this hole.

But frankly, a lot of (mostly liberal) economists don't think the number $1.35 trillion matters, so much as the content of its character. In November, when the CBO thought the deficit would get even higher, the New York Times' Paul Krugman blogged about the finer points of deficits. He compared our current deficit situation to last time it climbed so high, in the midst of World War II. Then and now, he said, most deficit spending was and is not an irresponsible, liberal shopping spree at the social services equivalent of Macy's, but emergency spending, in a crashing economy, in the midst of a war. A better evaluation of our fiscal policies, he said, would be to consider them in the context of a non-emergency situation. In other words, he was asking us to think about what's called our "structural deficit"--what our deficit would look like were we running smoothly at full employment.

If anyone heard Andrea Seabrook's (great) piece on Morning Edition today, you might remember she spoke with the CBO's Doug Elmendorf about a "disconnect in the American psyche, 'between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues they're prepared to send to the government to finance those services.'" It seems to me he was forewarning that our structural deficit, our long-held attitude towards government revenue versus spending, is what'll cripple us in the future, and not necessarily whether our current spate of bailouts and stimulus spending continue.

So before buying too much into anyone's 'solutions' to fixing the overall deficit, there are a few of questions that we have to deal with. First, when will we realistically be out of this financial emergency? And then, will a spending freeze help us out of this unemployment emergency or prolong it? And finally, if/when we do get back to normal employment levels--in other words, when our actual deficit more closely resembles our structural deficit--will we still be spiraling into a fiscal black hole if we don't fundamentally change how we tax and spend on social security, health care, and infrastructure?