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Yesterday I noted that the preoccupation with the size of the current deficit — which, as everyone reminds us, is ONE TRILLION DOLLARS — is completely misguided. Since then I’ve done some more arithmetic, which solidifies the point.

So, in fiscal 2012 (which ended September 30) we did in fact have a federal deficit of $1.1 trillion (pdf). The question is, however, whether this deficit represents, as everyone claims, a fundamental mismatch between what we want and what we’re willing to pay for — or whether it’s mainly just a reflection of the depressed state of the economy.

For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.

That still leaves $700 billion. Where’s that coming from?

OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP — what the economy would have produced at full employment — was $16.5 trillion over the same period. And if the economy had been at more or less full employment, we wouldn’t just have collected taxes on the additional income; historically, the tax share of GDP varies strongly with the business cycle. If the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.

Meanwhile, on the spending side, a large part of the rise in spending came from “income security” payments — in this case, basically unemployment insurance and food stamps — which surged due to high unemployment, but are already coming down. Here’s what happened:

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You don’t want to attribute all of the $250 billion rise since 2007 to the state of the economy, but a large fraction surely is slump-related. Also, the slump had impacts elsewhere too — for example on Medicaid spending, probably on more people taking disability, and so on. So a conservative figure for slump effects on spending would be at least $150 billion.

Put these together: $400 billion that doesn’t increase the debt-GDP ratio; $450 billion or so in slump-related revenue loss; $150 billion or more in slump-related expenses; and guess what: the ONE TRILLION DOLLARS is basically just a depressed-economy story, having nothing to do with any fundamental mismatch between what we want and what we’re willing to pay.

And this makes a lot of sense! The budget wasn’t deep in the red in 2007, and there have been no fundamental increases in government responsibilities or cuts in taxes since then (Obamacare won’t kick in until 2014, and it’s paid for in any case).

Let me say once again that this doesn’t mean all is well in the longer term. Baby boomers are retiring and health costs are still rising, so the budget prospect for 2020 or 2025 is troubling. But the current deficit has nothing to do with those troubles — which means that anyone who invokes ONE TRILLION DOLLARS to make a point about the budget thereby demonstrates that he has no idea what he’s talking about.