August 11, 2006

Off the cliff...

Mike Plaiss sent a link to a good Bloomberg editorial, If a Deficit Falls in the Forest, Do You Hear It?, by Amity Shales...

...This year, the new report says, the deficit will be $260 billion, or $111 billion less than the CBO estimated in March. For 2006, the government deficit will be 2 percent of gross domestic product, down from the old baseline prediction for 2006 of 2.6 percent. On Aug. 17, when the more extensive annual Update of the Budget and Economic Outlook appears, that 2 percent figure is likely to show up more definitively. But neither the budgeteers' news nor the prospect of a confirmation of it is generating much discussion.

This is surprising. The Economic Report of the President shows the federal deficit for 2004 was 3.6 percent. A narrowing of more than 1 1/2 percentage points in such a short time is itself a story.

The U.S. deficit is worth comparing, for starters, with the data for European nations. In the Maastricht Treaty of 1992, European leaders set a deficit goal of 3 percent of GDP. EU member countries have had trouble meeting that target since...

Indeed, they have had trouble, and will continue to do so. And the people who claim that Bush's deficits are sending us over a cliff will continue to ignore this. But more importantly, figures like deficits are only meaningful in the context of the economy as a whole. (It's insulting to explain this in baby-talk, but there may be liberals in the audience.) If my debts are increasing, but my assets are growing even more rapidly, I'm probably in good shape, as long as I can service the debt. (And if my assets are increasing because of the investments for which I incurred that debt, I'm probably making some smart moves!)

On the other hand, if my assets are not growing, if my income is not increasing, but my debts are increasing, I may be in bad shape!

Situation one is USA. Situation two is EU. Who goes off cliff?

Posted by John Weidner at August 11, 2006 10:51 AM
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