Brad Setser Likes Barry Eichengreen
NATIONAL JOURNAL: Insulating Bush (03/30/2006)

Why Oh Why Are We Ruled by These Liars? (Full Employment Budget Surplus Edition)

Menzie Chinn is not a happy camper:

Econbrowser: The Full Employment Budget Surplus: The Full Employment Budget Surplus: It is reputed that President Bush asserted that the budget deficits occured because nobody ever planned for tax cuts, war and recession to occur simultaneously. To my knowledge, nobody has ever been able to verify this quote, although President Bush lays blame on the recession in this 2004 press conference (some two and half years after the recession's end). But in any case, it is beside the point. The CBO has published its graph of the cyclically adjusted standardized budget balance. We are now long past the recession, yet the cyclically adjusted budget deficit remains large as a proportion of GDP, and is projected to start to shrink partly because of the "current law" assumptions CBO is required to incorporate by statute.

So the President has a point. Instead of a swing of 6 percentage points of GDP from peak to trough in the budget balance -- as implied by the unadjusted standardized budget balance -- the full employment budget balance has shifted by only(!) about 4.5 percentage points. (Although, as outgoing CBO director Holtz-Eakin said, these are the "good ol' days" as far as entitlements are concerned. Watch out for Medicare D!)

On a related note, CBO's recently released An Analysis of the President's Budgetary

Proposals for Fiscal Year 2007 (March 2006) has an interesting graph on page 3, showing that even with the Administration's optimistic forecasts on spending cuts, the deficit begins to deteriorate again in FY 2011.