A Budget Surplus by 2015?

Michael Stephens | May 15, 2013

That’s the implication of a James Pethokoukis post linked to here by Reihan Salam.  Let’s assume for the sake argument that a federal budget surplus does emerge in 2015 (yesterday’s CBO report projected the 2015 deficit would be a mere 2.1% of GDP).  Salam expresses concern that such a scenario would leave Republicans, who have been banging the austerity drum since inauguration day 2009, in a political and policy bind.  It would allow Democrats to declare “mission accomplished,” as Salam puts it, leaving Republicans with no agenda.

One problem with this analysis is that it assumes the voting public would even recognize/concede the existence of a budget surplus.  If you’ve been paying any attention to US public affairs, you’ll have observed that the realm of empirical fact is a fiercely contested battlefield (see warming, global).  And on budget matters, as Dimitri Papadimitriou has pointed out, the battlefield is tilted in one direction:  “The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.”

Now, it ought to be mentioned that no one should get any credit for a budget surplus in 2015 (or for a deficit as low as 2.1% of GDP, as the CBO predicts).  Under current economic conditions, this would represent the continuation of an inexcusable fiscal policy error — and the reason it would be an error points to another problem with Salam and Pethokoukis’s political concerns.

Growth has to come from somewhere.  Given the depressed economies around the world, there’s unlikely to be much of a boost from exports, and if the public sector will continue to withdraw purchasing power and jobs from the economy, that leaves the private sector.  But as the Levy Institute’s macroeconomic research team has been pointing out, the only way to reconcile the CBO’s budget forecasts with their growth numbers (given the IMF’s projections for GDP growth among US trading partners) is for private sector borrowing to explode (see Figure 5 of this Strategic Analysis).  If that doesn’t happen, we’re likely to see much lower growth than the CBO suggests.  But even the CBO’s growth numbers wouldn’t be high enough to shrink the unemployment rate down to a non-abysmal level by 2015; particularly since we’ve been experiencing a weakening link between output and job growth for over 30 years now (we need much higher growth to produce the rises in employment we saw in the past).

“Sure, the unemployment rate is still terrible, but look, no budget deficit!” isn’t a winning message outside of the constituency of op-ed writers (and maybe not even there).  In this sense, Salam’s political party has nothing to fear from a budget surplus.  Heading into a presidential election with an unemployment rate that still hasn’t recovered to pre-crisis levels after nine years gives the non-incumbent party a pretty solid talking point.

The budget surplus/high unemployment scenario would also set up the Republican party quite nicely in terms of a policy agenda — Salam’s second concern.  After all, the last several years have demonstrated that while the Republican party is rhetorically committed to austerity, its revealed preferences point to a much higher priority:  high-end tax cuts.  Demands for tax cuts can sound somewhat awkward when paired with deficit-reduction rhetoric, but with a budget surplus, it would be 2000 all over again.

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  1. Comment by Tyler HealeyMay 15, 2013 at 3:37 pm   Reply

    With household debt still over $10 trillion, I doubt that a federal budget surplus will emerge in 2015.

    Regarding tax cuts, I suspect working-class tax cuts increase revenue because of the vibrancy of these tax cuts in the economy. However, the recent Payroll Tax Holiday likely did not pay for itself because some of the tax relief went to the rich. That doesn’t mean it was prudent to allow the holiday to expire.

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