Posted by
Silvio Canto, Jr. on Monday, August 14, 2006 12:53:00 PM
What does a $260 billion budget deficit mean?
On its face, it is a lot of money. However, is it really a big number? How bad is it:
"This year, the new report says, the deficit will be $260 billion, or $111 billion less than the CBO estimated in March. For 2006, the government deficit will be 2 percent of gross domestic product, down from the old baseline prediction for 2006 of 2.6 percent." (If a Deficit Falls in the Forest, Do You Hear It? by Amity Shlaes)
Is it $260 billion or 2% of GDP? It is both and that's why these numbers are so misunderstood.
By any historical standard, 2% of GDP is actually very good:
"The U.S. deficit is worth comparing, for starters, with the data for European nations. In the Maastricht Treaty of 1992, European leaders set a deficit goal of 3 percent of GDP. EU member countries have had trouble meeting that target since.
A shortfall of 2 percent of GDP is also news in the U.S. context. Sure, there was the surplus in the second half of the 1990s.
But 2 percent is below the average for the federal deficit between 1980 and 1995."
What about our current deficit compared to other wars:
"The 2 percent figure stands out when you compare it
with the deficit level in other periods of war.
In 1944, as the U.S. poured its energy into winning World War II, the federal deficit widened to 22.7 percent of GDP.
In 1968, the year of the Tet Offensive in the Vietnam War, the deficit was 2.9 percent of GDP.
Much of the narrowing of the deficit in the 1990s -- and even the surplus of the late 1990s -- came because of reductions in military spending following the end of the Cold War. This was the short-lived peace dividend. The late 1990s boom also played a role: It brought in hundreds of billions more than forecast."
Both sides play politics with economic numbers. Yet, it is unfair to say that the Bush administration is running historical deficits.
Again, $260 billion is a lot of money. Yet, 2% of a $13 trillion GDP is not running historic deficits!