Cylically-Adjusted Deficit

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The CBO's Douglas Elmendorf writes,

Under CBO's baseline assumptions, the cyclically adjusted budget deficit will rise sharply in 2009, to 9 percent of potential GDP (from 2.6 percent in 2008), but then decrease in 2010 and 2011 to 4.7 percent and 2.2 percent of potential GDP, respectively.

This is the right way to distinguish the effect of the recession on the deficit from the effect of policy.  As you can see from the CBO's graph, some of the deficit can be blamed on the recession, but most of it cannot (graph after the jump).


cyclicallyadjustedgraph.png

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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