The Trillion-Dollar Scare Tactic

Today, the Washington Post casually warns [1] that "the annual federal budget deficit already is spiraling toward $1 trillion -- about 7 percent of the gross domestic product -- a level not seen since the end of World War II," to raise concern about the size of any proposed stimulus package in the next Congress. That prompted economist Dean Baker to ask on the Beat The Press blog, [2] "Where Does the Post Get Its Deficit Numbers?"

It's not clear where this trillion dollar figure came from. It is much higher than the most recent CBO estimate, which is $438 billion. The Post may be including the money for the bank bailout, however this would be misleading. The government is getting assets for this money and will at most lose a fraction of the $700 billion appropriated.

I suspect the Washington Post is keying off of yesterday's Boston Globe article, "Federal deficit could top $1 trillion." [3] But that piece too strikes me as having a dubious basis.

The Boston Globe cryptically sources the figure to "estimates provided to the Globe" by unnamed members of the "Senate Budget Committee and independent analysts."

And the only senator on the Senate Budget Committee quoted backing up that estimate is not anyone from the Senate majority, but the minority ranking member Sen. Judd Gregg, who opposed the previous, smaller stimulus package and would likely oppose any additional one.

So the estimate does not appear to be any sort of official conclusion by the committee as a whole.

Gregg based his concerns in part on the weakening economy:

Gregg said the problem is being compounded by an enormous drop in government tax revenues, which in recent years had been growing as investors cashed in stock market profits. With few people making money in stocks this year, tax revenues will fall sharply, probably by at least $100 billion.

"The economy is a dropping like a rock and the federal government will feel that very quickly on the revenue side," Gregg said in an interview. "I think it is very hard in the context of a trillion-dollar deficit to add new programs to the books."

Yet, as the Globe noted -- in a brief, downplayed aside -- smart public investment can help grow the economy and address that specific problem:

Economists said the goal of the stimulus program would be to create enough growth to eventually offset the cost of the program and, in the long term, reduce the deficit. They said that if the stimulus plan does spur substantial growth, that would help the banks that have borrowed money from the government under the financial bailout plan to repay the loans with interest. That, in turn, would help shrink the deficit if other economic problems are brought under control, the economists said.

Baker makes the point [2] as well:

The [Washington Post] article also asserts that this spending may make it more difficult for the government to pay for Medicare and other programs in future years. This is not clear. If the stimulus boosts the economy it will lead to more tax revenue in future years. More importantly if it makes the economy stronger and prevents a prolonged downturn, it will make it much easier to raise the revenue for Medicare and other obligations in future years.

That's the actual debate.

Not whether additional spending will grow the deficit by its sheer size alone. But whether the items that make up a stimulus package will amount to potent investment that will both expand the tax base and produce cost savings, or wasteful spending that will do little for the economy and leave the budget in tatters.

Flashing a trillion dollar deficit bugaboo is a meaningless scare tactic. Let's have a real debate on the merits of the specific public investments proposed.