Is $9 trillion estimate on deficit too low?

The midyear budget corrections from the White House and the CBO have been issued, and the item most people talk about is the fact that the White House increased its deficit estimates $2 trillion from the $7 trillion that had been the centerpiece of their economic policy back in January to approximately $9 trillion.

Most pundits have pointed this out, but some economists have started to observe that even the $9 trillion estimate of the CBO is potentially only 66% of the true deficit we shall see in the next ten years.

The best place to see this graphically is at the site of the Concord Coalition. They have a graph showing that they agree with the 2009 and 2010 estimates, but then diverge from the CBO estimates and predict higher deficits throughout the decade. However, they are willing to point out why:

CBO is required to assume that congressional appropriations continue increasing only at the rate of inflation for the 10 year baseline. They also extend emergency supplemental at their "current" level plus inflation over the duration of the baseline. For tax legislation, they assume current law will govern--so if there are tax cuts that have sunsets (as the 2001 and 2003 tax cuts have), CBO is required to project revenues assuming the tax cuts expire as written in the legislation. They also project economic growth in a very conservative fashion--they do not try to anticipate major changes in the economy, either recessions or accelerations.

Read that quote again. The CBO estimates are assuming no increase in spending beyond the rate of inflatioon, something we haven't seen in years and which is very unlikely. The CBO also is projecting increase revenues from the expiration of the Bush tax cuts of 2001 and 2003, as well as no extension to the AMT waivers that have been passed every year. It has helped keep the deficit estimates lower than they would be otherwise.

Blogger EconomistMom is quite clear about her feelings at her site and points out:

If you start with CBO’s more pessimistic baseline budget outlook of $7 trillion in deficits (by the way, the equivalent pre-policy baseline estimated by the Administration is $6.259 trillion), then add in the CBO-estimated cost of policies that have a good chance of coming true in the future (but aren’t yet written into law), you can come up with a projection that is perhaps more “plausible” than both the Administration’s (optimistic) $9 trillion and CBO’s (naive baseline-constrained) $7 trillion. That’s what we at Concord try to do when we come up with our “Concord Plausible Baseline,” which based on today’s CBO report shows that current policy would lead to $14.4 trillion in deficits over the next 10 years.

And this updated plausible baseline is based on the CBO numbers, which were released on Tuesday.

Deficits can be a good thing if they are limited and understood, but when back in March the director of the president's Office of Management and Budget declared that a $9 trillion deficit from 2010 to 2019 would be unsustainable and estimates now indicate that $9 trillion could be a $5 trillion underestimate, every American should be concerned.

And remember the coming deficits of Social Security and Medicare are NOT included, although current projections say that Social Security will not start running a deficit until after 2020. Medicare is expected to have insufficient revenue by 2017. If the plausible baseline is correct, there is little possibility that the world economy will absorb the deficits freely.

I maintain that economies are resilient and can recover from just about any downturn. However, they cannot recover if the governments engage in policies, which destroy faith in the currency and drive interest rates up. In the early 70's many economists began to notice that Keynesian deficits were no longer stimulating the economy, and more than a few blamed the stagflation on government policies which squeezed the private sector. Now we are seeing the policies of that era brought back, even when people like Harvard Economic professor Greg Mankiw point out that we are digging a deep fiscal hole that the entire nation will have to fill someday.