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Responding to today’s new, more pessimistic CBO scoring of the president’s budget in light of the deteriorating economic situation, Peter Orszag was at pains to emphasize that deficit projections are highly sensitive to relatively small changes in assumptions. For example, suppose that first you project revenues of $100 and spending of $103 for a $3 deficit. Then you get some bad news about the economy so projected revenue drops by five percent. Well, suddenly you’re looking at a deficit of $8. The alarming way to put this is that the deficit has nearly tripled. The calm way is that revenue has fallen by 5 percent.
Well, yes, deficit projections are highly sensitive to small changes in assumptions, which is why presidents traditionally tweak their assumptions to produce rosy economic projections. It doesn't take much. Obama and Orszag actually did this less than most administrations in their initial budget proposal, I think, but they still did it. And now it's coming back to bite them since, in fact, the alarming way of looking at this is also the correct one.
Now, given the current state of the economy, a larger deficit might be a feature, not a bug. But if the deficit stays above 4% of GDP for an entire decade, as the CBO suggests, then we have a problem. We can't keep that up forever any more than Wall Street could keep the subprime bubble going forever. Someday we're going to pay.