We know the deficit will be high. But don't slow down stimulus because of it

Late last week, the Congressional Budget Office updated its outlook for the next ten years for both the deficit and the economy. And while the numbers are bigger for this year than in CBO's last projections, the long-term deficit has actually gone down.

Changes Since CBO’s Previous Projections. Relative to its estimates from September 2020, CBO’s estimate of the deficit for 2021 is now $448 billion (or 25 percent) larger, and its projection of the cumulative deficit between 2021 and 2030 (at $12.6 trillion) is now $345 billion (or 3 percent) smaller. In 2021, the costs of recently enacted legislation are partly offset by the effects of a stronger economy. In subsequent years, the largest changes stem from revisions to the economic forecast. CBO now projects stronger economic activity, higher inflation, and higher interest rates, boosting both revenues and outlays—the former more than the latter.

Stronger economic activity but higher inflation? I think I'd take that trade. Tell me more about this "stronger economy", CBO.

The Economy. As expanded vaccination reduces the spread of COVID-19 (the disease caused by the coronavirus) and the extent of social distancing declines, real (inflation-adjusted) GDP is projected to grow by 3.7 percent in 2021, returning to its prepandemic level by the middle of the year. With growth averaging 2.6 percent over the 2021–2025 period, real GDP surpasses its potential (maximum sustainable) level in early 2025. The unemployment rate gradually declines through 2026, and the number of employed people returns to its prepandemic level in 2024.

Real GDP growth averages 1.6 percent over the 2026–2031 period. That average growth rate of output is less than its long-term historical average, primarily because the labor force is expected to grow more slowly than it has in the past. Over the forecast period, the interest rate on 10-year Treasury notes is projected to rise gradually, reaching 3.4 percent in 2031…..

Real GDP expands rapidly over the coming year, reaching its previous business-cycle peak (which was attained in the fourth quarter of 2019) in mid-2021 and surpassing its potential level in early 2025. The annual growth of real GDP averages 2.6 percent during the five-year period, exceeding the 1.9 percent growth rate of real potential GDP (see Figure 2-1).

That's a situation we can hope comes to reality. But it's only going to happen if we keep hammering down on both the virus and in stimulus/stabilzation to deal with the COVID-caused crater in several aspects of our economy.

And the deficit should not be thought of as a reason to avoid giving stimulus checks this year to some people that got them in 2020, as is being rumored. Now let's not panic too much yet, as the current stimulus bill in the House allows more people to get checks than before, and will be fully paid at higher income levels. Conversely, the House stimulus checks phase down faster than December's stimulus bill, and all single filers making $100,000+ and joint filers making $200,000+ still would get nothing.

If they want to phase down the checks faster so that no one above those income levels gets a check, that's fine (but it better account for income levels in 2019 AND 2020, as the House bill currently does), but cutting off some members of the often-indebted upper-middle class would be politically and economically stupid.

With layoffs staying high in this COVID Winter, people will not be able to return to anything resembling normal in 1 month, when most of the prior stimulus measures expire. So understand that the strong economic growth that the CBO is projecting becomes less likely the longer we dawdle on getting the stimulus in place. And that stimulus cannot be limited over foolish concerns about a budget deficit which right now is more a number on paper over any kind of drag on the economy.