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May 20, 2010

Can we grow out of the deficit

Reducing $1 trillion federal budget deficit is one goal that most everyone has. The hard part is how. One viewpoint says, 'Don't worry; the deficit will drop as the economy grows.' Can we count on this happening?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Partly. ... The deficit is now about 11 percent of the economy -- 11 percent of what economists call GDP. And actually the goal of policymakers is not necessarily get that deficit to 0, but to get it to 3 percent of GDP. And what that means is that if the economy on average is growing at 3 percent, you can afford, if you will, to have your deficit to be 3 percent of GDP. You don't want it to actually be more than that.

"Experts think that economic growth will cut that 11 percent deficit of GDP in half to about 5.5 percent. And so then if you say, '5.5 percent and our goal is to get to 3 percent -- that leaves us with 2.5 percent of GDP to cut.' And in dollars, that amounts to $350 billion.

"So what many in Washington think is we really don't have to worry about reducing the deficit by $1 trillion; we really have to worry about reducing it by $350 billion.

"Now that is still a big number, and the guessing game in Washington right now is what combination of potentially new taxes and spending reductions will politicians be able to agree upon to get $350 billion dollars a year."

Posted by deeshore at May 20, 2010 02:30 PM