So the Bush Administration is now predicting a $482 billion deficit for FY2009, or 3.5% of projected GDP. That’s about comparable in percentage terms to the deficit in the worst year of this Administration, and actually a little better (again, in percentage terms) than the worst years of the Reagan or the G. H. W. Bush Administrations. So it’s no big deal, right?
Except that the last time we ran massive budget deficits, the personal savings rate for American households was still in the high double-digits. The personal savings rate dropped dramatically from the mid-1990s – but that was at the same time that the government went into surplus, so the national savings rate (personal+business+government) was still positive. That number is now close to or below zero. Also, in the 1990s, when we grew our way out of the deficits of the Reagan and Bush Sr. Administrations, we did so through surprisingly rapid productivity growth. Early indications are that we are in a different era now – if there is another wave of rapid productivity growth coming, we haven’t seen it yet, and if it doesn’t come then we will not be able to easily to grow our way out of these problems.
The best-laid domestic schemes of mice and men (I leave it to the reader to assign “mouse” and “man” among the two leading candidates for President this year) are likely to gang a-gley in the next couple of years, much as President Clinton’s domestic agenda did in 1993-1994. It almost doesn’t matter what either candidate is proposing, at least if what one is looking for is a guide to what they will do once elected. The real question we should be asking is not what plans this or that candidate has for tax cuts or for new spending initiatives, but which candidate is going to better handle things when his budget director says, “I’m sorry, sir, we can’t afford any of that.”
Update: I don’t want to overstate things, by the way – I don’t think a green-eyeshade economics is any more useful than a green-eyeshade politics. But it is genuinely striking to me the degree to which neither candidate is talking about domestic policy in a way that seems to reflect the constraints of the actual world we find ourselves in. Obama’s economic proposals are almost entirely limited to redistributive plans that presume the economy as a whole is strong but the benefits have skewed unreasonably towards the top (in part because of larger economic forces, in part because of changes in regulation and bankruptcy law, and in part because of changes in the tax code and government subsidies). The latter part may be true but if the former is false much of his agenda needs to be rethought. And McCain’s economic proposals are a hodge-podge of contradictory impulses that I really don’t think are intended to be taken seriously as an economic plan – besides which, McCain would be negotiating with a Democratic Congress, so even if they were intended to be taken seriously by the voters, they won’t actually be enacted. My point is just: the budget situation is relatively serious. And yet it isn’t being discussed as such. That’s worrying.