Tuesday, July 26, 2011

Dean Baker on the causes of the current federal deficit

Dean Baker in President Obama Doesn't Understand the Origins of the Deficit FDL 07/26/2011 catches the President misstating the recent history of the federal deficit:

The Congressional Budget Office's projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."

This is what is known as a "gaffe" of enormous proportions. It indicates that President Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble. This misunderstanding of the origins of the budget deficit could explain President Obama's willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid. [my emphasis]
There is another aspect to this, too, to which I'm not quite economics-literate enough to explain the connection to the factors Dean Baker identifies. Because the dollar is the world's reserve currency, other nations can be expected to hold dollars for their foreign-exchange reserves as long as the dollar maintains that role. That means that the trade balance will be continually in deficit, as it has been for many years. There is an accounting identity between domestic and trade deficits; combined public and private deficits equal the trade deficit. Since most states are required to balance their budgets, the federal government and private savers make up the domestic side of the equation. If private savers spend more than their income in a given year (a net private deficit), the federal government will run a surplus. If private savers earn more than they spend, which has been very much the case in the current Lesser Depression, the federal government will run a deficit.

I do know enough to say that this factor is consistent with what Baker observes, which is that the current "huge deficits came about entirely as a result of the economic downturn."

Tags: ,

| +Save/Share | |

Links to this post:

Create a Link


"It is the logic of our times
No subject for immortal verse
That we who lived by honest dreams
Defend the bad against the worse."

-- Cecil Day-Lewis from Where Are The War Poets?


  • What is the Blue Voice?
  • Bruce Miller
  • Fdtate
  • Marcia Ellen (on hiatus)
  • Marigolds2
  • Neil
  • Tankwoman
  • Wonky Muse


  • The Norway terrorist attacks, political violence a...
  • The physics of austerity economics
  • Far-right Christianist terrorism, here and in Euro...
  • Grumping about the debt-ceiling negotiations fiasc...
  • Joschka Fischer in 2009, looking forward to what m...
  • Social Security, Medicare and the future(s) of the...
  • Barack Obama as statesman of conventional wisdom
  • Michele Bachmann, the Village punditocracy and the...
  • Imagining Obama's proposals to Social Security and...
  • Tom Ferguson on the dangers of austerity politics ...



    [Tip: Point cursor to any comment to see title of post being discussed.]
    www TBV




    Environmental Links
    Gay/Lesbian Links
    News & Media Links
    Organization Links
    Political Links
    Religious Links
    Watchdog Links



    Atom/XML Feed
    Blogarama - Blog Directory
    Blogwise - blog directory



    hits since 06-13-2005

    site design: wonky muse
    image: fpsoftlab.com