Budget Director Peter Orszag wrote a blog post last Tuesday titled “A Short History of Deficit Reduction” in which he wrote:

The President’s Budget represents an important step towards fiscal sustainability: it put forward $1.2 trillion in deficit reduction over the next ten years, even excluding savings from the assumed ramp-down in war funding over time. Including these war savings, the deficit reduction proposed in the President’s Budget rises to $2.1 trillion.

This provokes an important question:  should we care about how much proposed policy changes reduce future projected budget deficits?  Or should we care about the deficits that result after those policy changes are made?

I think this is easiest to explain with an example.  We will look at FY 2012, which begins 20 months from now in October 2011.

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1.  Suppose I tell you that if we enact my policies, the deficit in 2012 will be 5.1% of GDP.

• You remember that any number above 3% means that our debt will expand as a share of the economy.
• You know that the average budget deficit since the end of World War II is 1.8% of GDP.
• You know that this 5.1% will be tied for the fifth-largest deficit since the end of World War II.
• You therefore conclude that this is a bad outcome.

Read the full post here