Something I’ve been meaning to write: get into a discussion of matters fiscal, especially with conservatives, and you’re bound to have somebody declaring that we have a ONE TRILLION DOLLAR deficit, which means that what Americans want from their government is far more than we can pay for, so we must slash the welfare state, etc.. Also, that the hole is so big that taxing the rich can’t possibly make any real difference (although somehow savaging the poor supposedly will).

So I think it’s worth pointing out just how misleading all this is.

Yes, we do have a trillion-dollar deficit. But a large part of that deficit is attributable to the depressed economy. Reasonable estimates say that we have an output gap of something like $900 billion a year — yes, some would dispute that, but it’s the estimate I find most convincing. This automatically raises the budget deficit by depressing revenue and leading to more spending on unemployment insurance and means-tested programs like Medicaid — the CBO doesn’t offer a simple ratio on this, but a survey of their estimates suggests that we’re probably looking at $300 billion or more in automatic stabilizers here. Then you need to add in non-automatic but nonetheless cyclically-determined things like extended unemployment benefits and the temporary payroll tax cut. The point is that economic recovery would shrink the budget deficit a lot — almost surely more than $400 billion.

Meanwhile, zero is not the crucial number for the deficit; a much better criterion is the budget balance that would, on a sustained basis, stabilize debt as a percentage of GDP. Now, debt is currently slightly over 70 percent of GDP; with 2 percent growth and 2 percent inflation, that means that a deficit of almost 3 percent of GDP, say $450 billion, is consistent with a stable debt ratio.

Put these things together, and the real hole in the budget is a lot smaller than a trillion dollars — in fact, there may not be a hole at all.

Now, this doesn’t mean all is well. For one thing, if and when the economy recovers we really should be trying to reduce the debt ratio, not just keep it stable. Also, an aging population and rising health care costs mean that under current policy we will have a substantial structural deficit a decade from now, even if we don’t have one currently. So I don’t want to suggest that there is no deficit issue. But it’s nothing like the ONE TRILLION DOLLARS that you keep hearing.