Is A Lower-Than-Expected Deficit A Good Or A Bad Thing?
Today's The Washington Post includes a story by David Cho about how this year's deficit could be substantially -- $300 billion or so -- lower than was projected when the Obama fiscal 2011 budget was released in February. The reduced deficit would be the result of higher revenue because of economic growth and lower spending on the financial bailout.
The question is whether this is a good or a bad thing.
Brad DeLong says that it would be unequivocally bad given that unemployment is so high and more needs to be done to bring it down. But the administration officials anonymously quoted by Cho obviously were leaking the story because they thought the news would be very well-received, that is, they think it's good thing.
And the combination of the two is the tension that has existed in Washington since the start of the Obama administration between economic policymaking and political needs.
Brad is almost certainly correct that, from the perspective of needing to bring down the unemployment rate from 9.7 percent, a lower deficit is not helpful. But by leaking this story at this point in the year (budget numbers are not officially updated until the midsession review is released over the summer), the White House is clearly signally several things:
- Unless there's an additional economic downturn that few are currently expecting, it's not going to propose any further stimulus efforts.
- The White House doesn't believe that any additional stimulus will get through Congress this year.
- Stimulus and a stimulative fiscal policy are no longer topics the White House wants to discuss.
- The administration believes that now is the time to begin to talk about deficit reduction.
The interesting thing is that the White House somehow thinks that, even if it is $300 billion less than anticipated a few months ago, a deficit of $1.3 trillion is something it can use to demonstrate its budget acumen. That may be true fiscally and in terms of managing the bailout, but from a communications standpoint the headline of a more than $1 trillion deficit isn't likely to be taken as a sign of any success by too many people. And even if it is less than expected, a deficit of that size is certainly going to be demagogued by the GOP.
My guess is that the lower-than-projected 2010 deficit leaked yesterday to Cho ultimately is going to be even lower by the time the fiscal year is over; administration's don't typically get all of what it considers to be good news on the budget at one time or to raise expectations early in the year only to dash them later. This will be especially true this year because the fiscal 2010 budget results will be reported by the Treasury just a week or two before the November elections. When he was Office of Management and Budget director and then White House chief of staff, Leon Panetta was famous for always leaving some good news to be reported at the end of the year. Back then, Leon was talking both about much lower than expected deficits and then steadily growing surpluses.
As I read the spending and revenue tealeaves, a deficit closer to $1.1 trillion, that is, a whopping $500 billion below what was projected earlier in the year, is possible. That would make it possible for the administration to show the deficit reaching a "sustainable" level faster -- as in years earlier -- than is now expected.