Published: February 12, 2013

The budget deficit in 2013 is expected to fall below $1 trillion for the first time in five years. Perhaps policy makers in Washington can now focus on the other $1 trillion deficit, one that gets next to no attention yet is much more threatening to the well-being of American families: our sluggish economic growth.

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Applicants at a job fair last month. Unemployment may stay above 7.5 percent through 2014.

Eduardo Porter writes the Economic Scene column for the Wednesday Business section.


At the end of last year, according to the nonpartisan Congressional Budget Office, the economy was still about 5.5 percent smaller than it would have been had it avoided the recession and kept growing along its long-term potential path, making full use of the workers and equipment currently sitting idle. A rebound is hardly around the corner. Growth this year will average only 1.4 percent, according to the budget office’s latest forecast. By the time we recover to our potential — which the C.B.O. expects will take until 2017 — the Great Recession set off by the implosion of the housing bubble more than five years ago will have cost us nearly half of one year’s entire economic production: about $7.5 trillion.

We will be paying the price for years. The slump is hindering capital investment, stunting the careers of college graduates and encouraging workers to drop out of the labor force, potentially blighting the economy over the long term. The C.B.O. expects unemployment to remain above 7.5 percent through next year.

And low growth is crimping government finances — reducing tax revenue while, at the same time, increasing the cost of programs like unemployment insurance. Last year, the budget office calculated that sluggish growth alone was responsible for more than a quarter of the budget deficit over the last four years.

And yet the government is doing little to turn things around. The collapse of public spending, mainly by state and local governments, explains most of the subpar growth since 2009, according to the C.B.O., more than sluggish consumer spending or business investment. In the final three months of last year, the economy may have even shrunk a bit, dragged down by declining military spending.

Now, the government is expected to deliver another wallop to the struggling economy. This year, the budget office expects that budget tightening — including the so-called sequestration, the battery of spending cuts set to take effect on March 1 unless the White House and the Republicans agree on an alternative plan to cut the budget — will cut economic growth in half.

Our protracted stagnation calls into question the priorities of our elected officials, who are consumed in a debate over how to cut spending even as the economy drifts. “We should be thinking about all the tools of economic policy to get the economy to escape velocity,” said Lawrence Summers, President Obama’s former top economic adviser.

This is bringing us back to the questions that were hotly debated over the Obama administration’s fiscal stimulus package of 2009. What power does the government have to pull the economy out of its rut? How much do tax cuts or spending programs stimulate growth? Even if Mr. Summers’s priorities were shared across the political spectrum, there is little consensus on what kind of tools should be used.

Jared Bernstein, the former chief economic adviser to Vice President Joseph Biden who is now at the Center on Budget and Policy Priorities, argues that while fiscal consolidation would have been necessary at some point, the government slammed the brakes on spending before families were ready to spend again, while they were still working to reduce large debt burdens.

“The stimulus didn’t last long enough,” Mr. Bernstein said. “We pivoted to deficit reduction too soon.”

Not everybody agrees. Conservative economists, and most Republicans in the House, make the exact opposite argument: that spending cuts stimulate growth by giving businesses confidence that the government will be able to pay its debts.

While few economists share this view, many are indeed skeptical of deploying more government spending now to pull the economy out of the hole. When the Obama administration unveiled its first fiscal stimulus package, in the early weeks of 2009, the federal government’s debt to the public amounted to only 35 percent of our gross domestic product. Today, it amounts to about 75 percent. That kind of debt scares people.

“If debt were at 20 percent of G.D.P. I would be a big stimulus guy,” said Olivier Blanchard, the International Monetary Fund’s chief economist. “Now, more fiscal stimulus would be playing with fire.”


The Congressional Budget Office’s calculations suggest caution. It estimates that the administration’s fiscal stimulus produced about $1 of economic output for every $1 in stimulus, on average. Spending on infrastructure — say, repairing bridges and roads — produced a bigger bang for the buck, because it also encouraged private investment. Tax cuts, on the other hand, yielded less, because taxpayers saved some of their windfall rather than spend it.

Since federal taxes across the entire population add up to a top rate of about 25 percent, this implies that $1 worth of stimulus would generate 25 cents in taxes, increasing the deficit by 75 cents.

Earlier this month, the budget office produced an analysis of the impact that further deficits would have on the economy. A $2 trillion fiscal stimulus would increase growth for the next three or four years. But as the economy recovered, the deficit would crowd out private investment, reducing growth over the decade. By 2023, government debt would amount to 87 percent of G.D.P.

Perhaps low growth is something we have to live with, for now. Even assuming that sequestration takes place, the C.B.O. forecasts that the economy will grow 3.4 percent next year — bringing us a little closer to our maximum potential output. In a related analysis, it concluded that while budget tightening weakens the economy in the short term, growth rebounds more strongly a few years down the road.

“We’re almost there in terms of fiscal adjustment,” said Simon Johnson, a former chief economist of the I.M.F. who is now at the Massachusetts Institute of Technology and the Peterson Institute for International Economics. “If we don’t do it now,” he asked, “when will we?” Even the liberal research group the Center for Budget and Policy Priorities recommends that the budget deficit be cut by a further $1.5 trillion over the next decade to stabilize the federal debt.

But there is another way to look at our policy options. It just requires analyzing more closely the potential return on public investment over the long term.

Mr. Summers points out that there are many profitable investment opportunities for the government to improve the nation’s physical infrastructure, opportunities that would yield much more than a dollar in economic output for each dollar spent. There is also plenty of idle capacity in the construction industry — unemployed workers, unused machinery. And the government can borrow for 15 years at negative real interest rates.

While he argues that we also need commitments now to reduce future budget deficits, not borrowing the money now to make the investments would be unconscionable. Some of them may even pay for themselves.

Putting fallow resources to work — which also means employing men and women who are becoming obsolete — will, he suggests, bolster growth more than people expect. “It’s not like we’re never going to fix our infrastructure,” Mr. Summers said. “Not doing it now burdens future generations just as surely as more debt does.”