The Congressional Budget Office published revised estimates about the deficit, and people are hyperventilating. “[B]urying our children and grandchildren under a mountain of unsustainable debt,” declared House minority leader John Boehner (R-Ohio).
Leave aside for a moment the cause of the deficit. The Economic Policy Institute shows that the biggest cause was the Bush tax cuts, followed by the war in Iraq. Even the stimulus bill and the bank bailout shrink by comparison. And the CBO’s revision upwards is more about the shrinking economy (and declining tax revenue) than new government spending.
What’s most important is perspective. Our deficit is high, but it is not extraordinary by historical or international norms. Seen as dollars, the deficit is frighteningly large (trillions, yikes!). But America has a gigantic economy. To gain perspective, economists usually measure deficits as a percent of GDP. Viewed that way, the deficit seems more manageable.
The CBO estimates a deficit this year of $1.6 trillion. It measures our economy as $14.1 trillion, making the deficit 11.2% of our GDP. It’s a lot. But it can be managed. It is like a person who earns $30,000 and ends the year with a $3,400 deficit. Irresponsible if it bought a plasma TV. A strategic investment if it bought education or a new set of tools. America ran a budget deficit for most of our stunning post-war boom.
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., raising their deficits to meet current needs. In 2008, France’s public debt was 64 percent of its GDP; Germany’s was 63 percent. Japan sets the scale at 170 percent.
This perspective may help us to calm down. It may help us to see why former Labor Secretary Robert Reich wants the deficit to be even bigger. “With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more — and the deficit has to be larger — in order to get people back to work.”
Build the roads. Build the bridges. Borrow the money. Put people to work. The best way to shrink the deficit as a percent of GDP is to grow the economy.