25 February 2013.
Cheer up, America. Yes, it's February. But spring training has begun, the days are growing longer, the weather is getting warmer, and—are you ready for this?—the federal budget picture is improving.
Yes, improving. After so many years of bad budgetary news, this may be hard to believe. The public mood certainly seems stuck in a rut of despair and dismay. But budget mavens have noticed several significant developments:
Despite seemingly unending political battles, Congress and the president have managed to agree on several measures that reduce the projected 10-year deficit considerably. In addition, the Congressional Budget Office has quietly lowered its deficit projections, in part due to changes in the underlying economic forecast and in part due to changing cost estimates for health care and other items. The country also avoided the dreaded Jan. 1 "fiscal cliff" and pushed the even-more-dreaded collision with the national debt ceiling back to at least May. Meanwhile, Republicans are talking far less menacingly about either shutting the government down or precipitating a debt crisis.
About the only bad budgetary news has been the increasing likelihood that the sequester—that's Latin for "cutting federal spending stupidly"—will actually occur on March 1. If deficit hawks were to tally the score since President Obama and House Speaker John Boehner failed to reach a "grand bargain" in August 2011, they might start adding smiley faces to their text messages.
Let's stack these recent developments up against the goal set in the summer of 2011: to chop about $4 trillion off the deficits projected for the next 10 years.
While the grand bargain talks dissolved in acrimony, they did produce the Budget Control Act of 2011. That law created land mines like the fiscal cliff, but it also cut spending by over $1.9 trillion once you include the associated interest savings, as you should. (Here and elsewhere, I use the 10-year budget window 2014-2023 and recent estimates from the widely respected Center on Budget and Policy Priorities.) That was all spending cuts, no tax increases.
Then came the New Year's Day agreement that averted the cliff. The headline number then was about $600 billion in tax increases. But if you add in the spending cuts and the associated decrease in debt service, it came to another $850 billion or so.
Adding these up, the two budget agreements have taken us more than two-thirds of the way toward the $4 trillion deficit-reduction target. Close enough, in fact, that the sequester, if it happens, will nearly finish the job.
Now, don't get me wrong. I don't welcome the sequester. Its meat-ax approach chops spending bluntly and indiscriminately. But imagine that our legislators agree instead on a smarter package of spending cuts and revenue raisers that amounts to the same amount of money. After all, it's only about 0.6% of GDP. Then we'll have achieved the $4 trillion target. The Center on Budget and Policy Priorities estimates that doing so would be enough to stabilize the debt-to-GDP ratio at about 73%, which is a sensible goal for now.
Deficit hawks will object that the original $4 trillion goal applied to fiscal years 2012-2021. When you roll the budget window forward to 2014-2023, substantially larger cuts are needed to keep the debt-to-GDP ratio from rising. That's true. But, during that same period, the CBO's technical and economic re-estimates have made the deficit target substantially easier to reach. If you do the math, the two adjustments come close to cancelling out one another. So a number like $4 trillion remains a reasonable target for policy changes.
One factor behind CBO's re-estimates has been a remarkable decline in the rate of increase of health-care costs. Medical costs are still rising, but at a far slower rate than looked likely only a few years ago. Writing in the New York Times this month, Ezekiel Emanuel, a physician and professor at the University of Pennsylvania, branded this development "truly a sea change."
Seas change slowly. But the numbers Dr. Emanuel cited are dramatic. Between 1965 (when Medicare was founded) and 1993 (when Bill and Hillary Clinton tried to curb medical costs), health-care spending grew 3.2 percentage points faster than GDP.
Since 2004, that gap has been shaved to a mere 0.8 percentage point. And the more recent news is even better. Over the past three years, according to Dr. Emanuel, Medicare costs have actually grown slower than GDP.
Some of this "cost control" is due to the weak economy: Hard times lead people to postpone or cancel some medical care. But health-care inflation began to fall years before the recession began, which suggests that deeper forces are at work. If we can somehow slow health-care costs to the rate of GDP growth, our long-run budget problem is basically solved. It's far too early to declare victory, but there's reason for hope.
Finally, while the Republicans are not about to roll over and play dead, their budget rhetoric has become notably less belligerent of late. In particular, several GOP leaders, including House Speaker John Boehner and House Budget Committee Chairman Paul Ryan, have said either that they don't want to shut down the government when the current stopgap budget expires on March 27, or that they don't want to threaten default on the national debt, or both. Hooray for that.
Three lessons emerge from these improvements in the budget outlook. First, sometimes the news is good; we should not routinely assume the worst. Second, mirabile dictu, all that political warfare actually got us somewhere. Third, with a stable debt-to-GDP ratio now in sight, the fixation on reducing the budget deficit, to the exclusion of all other national goals, seems strangely anachronistic. The nation has other priorities, too—such as faster growth and more jobs.
Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin, 2013).