Good deficit, bad deficit.

Obama has introduced his budget, and people are hyperventilating about the deficit. Piling “debt on the backs of our kids and our grandkids,” declares House minority leader John Boehner (R-Ohio). “Bloated,” exclaims Democrat Evan Bayh of Nebraska.

With all the hyperventilating, we are forgetting what’s most important. Deficits aren’t necessarily bad. Sometimes deficits can be good.

Credit card debt for a plasma TV? Bad.
• Low interest loans for a college diploma? Good.

Buying a second car you don’t need? Bad.
• Borrowing for a house when the kids are born? Good.

Deficits have taken almost mythical hold of our imagination. The word “deficit” has become a stand-in for words like waste and irresponsibility – so running a deficit is nearly synonymous with irresponsibility. But deficits are not necessarily irresponsible. Economists consider deficits simply one economic variable to be taken into consideration among many others.

Every successful business starts with a loan. Entrepreneurs earn their ulcers looking at their loan schedules, not expecting a profit until the third year. But still they borrow. It’s necessary to succeed.

The Obama budget shows deficits in the trillions. Maybe that’s okay. The US had a budget deficit for most of our stunning boom after World War II.

Our deficit might appear less frightening if we think not in terms of dollars, but as percent of GDP. The U.S. is a gigantic economy, so national numbers become frighteningly large.

Our deficit this year is $1.7 trillion. That’s big. But our economy is $14.2 trillion. That’s even bigger. Put them together and our deficit is 12% of our GDP. It is high, but not extraordinary by historical or international standards. It is like a person who earns $30,000 with a $3,500 deficit at the end of the year. It’s a lot. But it can be managed. Indeed, if the deficit bought some education or a new set of tools, it might not be irresponsible at all; it might even be worth it.

Deficits-Pct-of-GDP-history.gif
Source: OMB history, 1930-2008; CBO projections, 2008-10

Even if we look at the accumulated debt, not the annual deficit, the U.S. level of debt is lower than most advanced industrial countries’ – and during the current crisis, many other countries are, like the U.S., deliberately raising their deficits. In 2008, France’s public debt was 64 percent of its GDP; Germany’s was 63 percent. Japan sets the scale at 170 percent.

Debt-as-pct-of-GDP-2008.gif
Source: CIA

Obama seems to understand this. He’s at his best when he talks about cutting waste, but “what we will not cut are investments that will lead to real growth and prosperity over the long term.” Energy, health care and education are usually at the top of the list.

He’s at his worst when he promises to cut the budget deficit in half by the end of his first term. First, it creates an impossible expectation. Second, it accepts deficit reduction as more fundamental than it needs to be.

The conclusion: Don’t panic. Our deficit is high and it deserves attention. But at this time of crisis, deficit spending to make sensible investments and put people to work is both necessary and affordable. It can turn our troubles around, and build the resources that we need for the future – clean energy, an educated workforce and a 21st century infrastructure. Build, and build big.

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