A Reuters article on the new budget projections that will be issued by the Congressional Budget Office (CBO) on Tuesday told readers that: "new deficit projections pose risks to Obama's agenda." The article reports that the projections will likely show an increase in the projected 10-year deficit of $2 trillion (about 1 percent of projected GDP). The article does not indicate the source of the upward revision, but it is almost certainly be due to lower projected growth and higher projected unemployment. A weaker economy leads to a higher deficit because the government will collect less in taxes and pay out more in unemployment benefits and other transfer payments. The normal response to a weak economy is to push stimulus of various forms. If the economy is now projected to be weaker than had previously thought than this would be a compelling argument for more deficit spending, not less. While there are limits to the amount of debt that the United States can accrue, there is no evidence that the United States is anywhere near these limits. Investors are willing to hold 10-year Treasury bonds at just a 3.7 percent interest rate. This is lower than 5-6 percent interest rate they demanded in the late 90s when the government had a surplus and the political elite was talking about paying off the national debt in a decade. It is unusual for a news organization to editorialize so explicitly in a news article, but in this case, the content of the editorial is wrong from an economic perspective. Of course, if all news reporting on the deficit contains similar editorializing then Reuters may prove right from a political perspective.
--Dean Baker
