by Calculated Risk on 5/16/2011 01:47:00 PM

In discussions of the debt ceiling, I keep seeing comparisons to the 1995/1996 government shutdown (here is an example from the WSJ)

In fiscal 1995, the economy was in the middle of a strong expansion with the unemployment rate around 5.6%. There was no cyclical deficit (from a recession), just a left over structural deficit that was steadily being reduced. The deficit in fiscal 1995 was 2.2% of GDP (about 10.8% of outlays).

This year, the economy is fragile, the unemployment rate is at 9.0%, and the deficit is a combination of both a structural deficit and a cyclical deficit (from the great recession). The total deficit is now close to 9% of GDP and about 37% of outlays.

In fiscal 1995, the government could do the same "extraordinary measures" as today to delay the day of reckoning, and then eventually cut off all non-essential discretionary outlays (the "government shutdown"). That was enough to buy more time, and the government didn't have to default on the debt, or cut Social Security or Medicare payments.

Now there is a cyclical deficit on top of an even larger structural deficit. It is impossible to just shutdown non-essential discretionary outlays - the cuts will have to go deeper. So the comparison isn't valid.

From the numbers, here is the CBO analysis and historical data.

Clearly Stanley Druckenmiller (quoted in the WSJ article) is wrong in assessing the impact by comparing to 1995. Interesting that Mr. Druckenmiller was apparently warning about the long term deficit in the mid-'90s, so I find it strange that there is no mention of his stance on the "surpluses forever" position of Greenspan and the Bush administration in 2001 - since that was a key turning point and led to the large structural deficits. (note: if someone has Druckenmiller's 2001 comments on the deficit, please send them to me).

The good news is the cyclical deficit will decline over the next few years, and (hopefully) be gone by 2015 or so. That will still leave us with the structural deficit - and we will need to address the long term costs of health care - but I think those issues are solvable.