TOO LOW:

If a Deficit Falls in the Forest, Do You Hear It? (Amity Shlaes, 8/12/06, Bloomberg)

For 2006, the government deficit will be 2 percent of gross domestic product... [...]

The Economic Report of the President shows the federal deficit for 2004 was 3.6 percent. [...]

A shortfall of 2 percent of GDP is also news in the U.S. context. Sure, there was the surplus in the second half of the 1990s. But 2 percent is below the average for the federal deficit between 1980 and 1995.

The 2 percent figure stands out when you compare it with the deficit level in other periods of war. In 1944, as the U.S. poured its energy into winning World War II, the federal deficit widened to 22.7 percent of GDP. In 1968, the year of the Tet Offensive in the Vietnam War, the deficit was 2.9 percent of GDP.

Much of the narrowing of the deficit in the 1990s -- and even the surplus of the late 1990s -- came because of reductions in military spending following the end of the Cold War.

There is simply no historical precedent for so low a deficit during wartime, but it seems unlikely that the world economy can tolerate a US deficit that low at any time.

Posted by Orrin Judd at August 12, 2006 12:36 PM