Who Deserves Credit for Reducing the Federal Deficit?

Hey, looky here! Steve Benen highlights the chart on the right, which shows that President Obama is making steady progress reducing the massive federal deficit that was rung up in FY2009 by George Bush and the Republican Party. Nice work, Obama!

But wait. Does this seem a wee bit unfair? Fine. You’re right. Bush wasn’t responsible for the deficit. The Great Recession was responsible for the deficit. Nor is Obama (or Boehner or McConnell or anyone else) responsible for the reduction in the deficit. That happened because the economy started to recover. That’s it. That’s the whole story. Deficits always go up during recessions and they always go down after recessions end. Tax and spending policy makes a difference, but not much of one. Taxes and spending almost always go down during recessions, and they almost always go back up during recoveries.

However, with the deficit now around 3 percent of GDP, we’re back in fairly normal territory, which means that tax and spending policy does make a difference. (Until the next recession, anyway.) However, there’s an iron law that everyone should remember but nobody ever does. Here it is:

  • If we drive the deficit down to zero, then private savings have to equal our trade balance.

In other words, if we run a trade deficit, then we’ll have negative private savings. If we want positive private savings (and we do), then we either have to run a trade surplus or else we have to offset private savings with a big budget deficit. There is no way around this. It’s an accounting identity. So whenever you hear someone yakking away about the horrors of the federal deficit, ask them what they want in its place. There’s no hedging on this. You either want a trade surplus (no more living beyond our means!) or negative private savings (bad for growth). It’s one or the other, whether you like it or not.


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