Dean Baker on the “Deficit” (Relative to GDP)

AB readers may or may not realize that I’m a big fan of Dean Baker’s Beat the Press and that I differ from Dean’s wisdom only once in a Blue Moon. But it’s a Blue Moon today:

The Washington Post claims that the federal deficit hit a record $413 billion in 2004. While this is a record in nominal dollars, that is a meaningless number, as I trust the Post’s reporter knows. The deficit in 1983 was $207.8 billion. That was smaller in nominal dollars than the 2004 deficit, but so what? The U.S. economy was less than one-third as large in 1983.

Dean is reporting the nominal increase in the Federal debt held by the public – for which I have a couple of quibbles. Quibble one relates to the difference between nominal interest expenses v. real interest expenses, that is, the difference between the deficit in terms of the increase in nominal debt versus the increase in real debt. Quibble 2 – which is one that I can hammering on – has to due with the fact that the main reason why the unified deficit has declined of late is that the Trust Fund surpluses have increased. In other words, I’m a General Fund kind of Bear so pardon me while I report the real increase in total Federal debt. Before I do so, let me be fair to Dean but noting the rest of his post:

The 1983 deficit was equal to 6.0 percent of GDP. The 2004 deficit was only 3.6 percent of GDP. Even adding in the money borrowed from Social Security only brings the 2004 deficit to 4.9 percent of GDP, still more than 1.0 percentage points below the post-war peak in 1983. The current deficits are larger than can be sustained, but there is no reason to try to mislead readers to make things sound more scary. Reality is bad enough.

OK, my two cents. Reporting all figures in terms of 2000$, total Federal debt rose by $280 billion during fiscal year 1983. During fiscal year 2004, the real debt rose by $368 billion. The former represents 5.17% of real GDP for calendar year 1983, while the latter represents only 3.44% of real GDP for calendar year 2004. So by my measure, Dean is still correct.

But there is another consideration in this comparison. I think most economists would agree that while 1983 was a recovery year, we were still far below full employment. While we were below full employment in 2003, the GDP gap in 2003 was not anything close to the GDP gap in 1982. The White House may have be wrong during the 2004 Presidential campaign when they boosted about the 2004 economy being just great – the GDP gap in 2004 was less than the GDP gap in 2003. I’m not ready this evening to recast this comparison in terms of the standardized deficit – but something tells me that 1983 would look all that bad when compared to 2004.