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Wednesday, April 13, 2011

President Obama on the Fiscal Policy: 1:35 PM ET

by Calculated Risk on 4/13/2011 01:23:00 PM

As a reminder, we can divide the deficit into three components:
1) Structural deficit (General Fund ex-health care).
2) Cyclical deficit - a result of the severe recession and includes lower tax revenue, stimulus spending, and larger safety net costs.
3) Long term health care.

The structural deficit was introduced in 2001, and was based on some bad math and faulty projections. Back in 2001, the White House was projecting a budget surplus of $800 billion in 2010, and an "on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation".

With those projections, it was natural to want to return the surpluses to the people. That policy was supported by Representatives Eric Cantor and Paul Ryan, and also Senator Mitch McConnell. I single those three out because they are always talking about the deficit, but no one in the media asks them about their role in creating the deficit!

Of course those projections a decade ago were faulty. Some people argue the shortfalls were because of recession and war, but there were recessions in the '60, '70, '80 and '90s ... so a recession should have been expected. And there were wars in the '60s, '70s, and '90s, and a huge defense buildup in the '80 because of the cold war. A war contingency should have been included too.

The cyclical deficit was a result of the housing bubble and bust, and the financial crisis that followed. When I was predicting a housing bust back in 2005, I was concerned that we would be piling a huge cyclical deficit on top the structural deficit.

So by 2005 - for those paying attention - we already knew there was a huge structural deficit, a cyclical deficit coming, and that healthcare would be a serious problem in the future because of demographics.

Still it is possible to make progress. As the economy recovers, the cyclical deficit will fade away. And since the forecasts were wrong in 2001, the baseline approach would be to reverse those policies. David Leonhardt at the NY Times suggests doing that: Do-Nothing Congress as a Cure.

That still leaves healthcare - and that isn't an easy problem, but I think that should be the focus of Obama's speech.

And from the White House: