AB reader Fred C. Dobbs directs us to the Economic Assumptions chapter for the President’s budget. Starting on page 171, we see:
When the economy is operating below potential, the unemployment rate exceeds the long-run sustainable average consistent with price stability. As a result, receipts are lower than they would be if resources were more fully employed, and outlays for unemployment sensitive programs (such as unemployment compensation and food stamps) are higher; the deficit is larger (or the surplus is smaller) than would be the case if the unemployment rate were at its sustainable long run average. The portion of the deficit (or surplus) that can be traced to this factor can be called the cyclical component. The portion that would remain if the unemployment rate was at its long-run value is then called the structural deficit (or structural surplus) … Other factors unique to the current economic cycle provide other examples of less-than-complete cyclical adjustment. The extraordinary fall-off in labor force participation, from 67.1 percent of the U.S. population in 1997–2000 to 66.0 percent in 2004–2005, appears to be at least partly cyclical in nature, and most forecasters are assuming some rebound in labor force participation as the expansion continues. Since the official unemployment rate does not include workers who have left the labor force, the conventional measures of potential GDP, incomes, and Government receipts understate the extent to which potential work hours have been under-utilized in the current expansion to date because of the decline in labor force participation. A third example is the fall-off in the wage and salary share of GDP, from 49.2 percent in 2000 to 45.6 percent in the second quarter of 2004. Again, this change is widely suspected to be partly cyclical. Since Federal taxes depend heavily on wage and salary income, the larger-than-predicted decline in the wage share of GDP suggests that the true cyclical component of the deficit is understated for this reason as well.
Who wrote these words of wisdom and why? I wish I could take credit for this discussion, but Karl Rove did not invite me to contribute to this document. Could it be that he has decided to call upon Brad DeLong or perhaps Max Sawicky?
While such a decision would be a welcome change from the usual spin from this White House, I kind of doubt it. After all, these words were not written to finally admit that the labor market is still weak in spite of all those tax cuts over the past couple of years. Besides, the purpose of these paragraphs seems to be to excuse the large and continuing deficits.