CBO Has It Wrong: A Higher Deficit Isn’t Necessarily Evil

Posted January 12, 2009 at 1:32pm

I’m a huge Congressional Budget Office fan, and its Budget and Economic Outlook report released last week did nothing to reduce my enthusiasm for what the CBO does and how it does it. This annual report is now almost as widely anticipated and as much a must-read as the budget the president sends to Congress each year.

[IMGCAP(1)]But there’s one thing I strongly disagree with in the current report: the way the CBO characterizes the deficit. According to the opening statement (page 13), the 2009 budget outlook “will be dramatically worse than it was in 2008.” In the next paragraph, CBO the says there has been a “deterioration in the fiscal picture.” (The italics are mine in both quotes.)

There is no doubt the federal deficit will increase substantially from 2008 to 2009. But an increasing deficit in the current economic environment is not necessarily something that is worse, deteriorating or any other pejorative adjective. In fact, it could be just the opposite: A bigger deficit could well be a sign that things are better and improving — and, therefore, something we actually want to happen.

The CBO language is a budget anachronism, an almost perfect example of the old budget politics that has dominated policymaking in Washington for at least the past three decades. According to that old line of thinking, a deficit is always bad, should always be going down and is an unambiguous sign of failure. In the past, an increasing deficit typically was the impetus for someone calling for a new budget process, a budget summit, a special task force or some other device that would make the red ink flow in the opposite direction.

It was this type of thinking and budget politics that encouraged the Bush administration to promise to cut the deficit in half. The White House apparently deemed that position to be so proper that then-Treasury Secretary John Snow repeated it in public as if it were his mantra. Almost no one questioned Snow about how he knew in 2003 that a deficit half its size would be the correct budget policy several years later, because it was just taken for granted that reducing it would be the right thing to do. Depending on the economy, however, a larger or much smaller deficit than what Snow was promising might actually have been the correct fiscal policy.

It’s not that the deficit isn’t increasing: As the CBO report amply confirms, that absolutely is happening. But an increasing deficit isn’t always something that should be feared or avoided, and to characterize a projection as worse or say that the outlook is deteriorating as the CBO said in its report, indicates that’s the case.

In the current economic context, a rising deficit isn’t necessarily a reason to immediately convene a new Andrews Air Force Base-like budget summit, put in place a new Gramm-Rudman-Hollings-like budget process or start to do any of the other responses that have generally been proposed or tried in the past when the deficit has reached previously unimaginable levels. If the deficit is rising because of policies put in place to deal with the recession, and if those policies are working, it could actually be a cause for celebration.

This obviously won’t please many deficit hawks (for the record, I generally put myself in this category), many of whom, are unhappy at the size of the deficits the CBO projected last week and the even larger deficits that will occur after a stimulus bill is enacted and implemented. But the economy — not the deficit — is the current issue, and fixing it will require the deficit to be higher, and probably substantially higher, than it is currently projected to be.

That means a higher deficit isn’t always the cause for concern that the CBO’s words would have you believe. The key question should always be not whether but rather why the deficit is increasing. For example, Snow was chanting his cut-the-deficit-in-half mantra because, despite a growing economy, Bush administration taxing and spending policies pushed it higher. There is a great deal of concern about the deficit that will result from the projected growth in Medicare and Medicaid.

The more than doubling of the deficit in 2007 and 2008 occurred because of a rapidly deteriorating economy, the stimulus package that was put in place in February and the now much maligned Troubled Assets Relief Program. The growing costs of federal health care programs, the Bush policies and the falling U.S. economy were or are reasons to characterize the budget outlook as worsening; the stimulus and possibly TARP were not.

On top of everything else, the headline number in the CBO report ($1.2 trillion deficit) was overstated. It included a very substantial one-time budget scoring adjustment to account for the changed status of Fannie Mae and Freddie Mac that added close to $240 billion to the deficit in 2009. That’s spending that was moved on-budget for the first time and will barely continue in 2010 and beyond. In addition, given there was an implicit federal guarantee of these agencies in the past, the change quite properly could, and perhaps should, have been accounted for in the budget several years ago. If that had happened, the 2009 deficit would have been projected to be much lower and concern about it would be less.

TARP spending may also be skewing the budget outlook. A dispute has been raging within the federal budget world about not just how these funds should be counted but at what level. The CBO report includes $180 billion in 2009 for TARP. That, too, is a one-time charge that probably won’t be repeated.

But how much higher the federal deficit will be is largely beside the point. The thing to remember is that at least part of the deficits that will occur this year and next may actually be quite welcome, should be applauded, and, contrary to what the CBO might be saying, actually make it easier to sleep at night.

Stan Collender is managing director at Qorvis Communications and author of “The Guide to the Federal Budget.” His blog is Capital Gains and Games.