Saturday, October 17, 2015

The Curious Case of the Disappearing Deficit

Buried on page A21 of Friday's New York Times was news that our budget deficit for the fiscal year that ended on September 30th was $439 billion - $44 billion less than the prior year, almost $1 trillion less than its peak during the Great Recession, and a mere 2.5% of Gross Domestic Product (GDP). 

That you may not be aware of this fact is unsurprising. If the "paper of record" deems this story inconsequential, do not hold your breath that the nightly news, the Sunday chat shows, or anyone else in the media will do anything other than make passing reference to this fact. And that too says something. It was not so long ago that the media was obsessed with the budget deficit, egged on by Republicans who pulled out Talking Points 101 from their playbook about the need to slash Social Security and Medicare or fear becoming a beggar nation like Greece. There was breathless coverage of the tick-tock of "grand bargain" negotiations between the President and John Boehner and one of DC's favorite creations, the blue ribbon commission, was formed to provide a blueprint for long-term deficit reduction.

But a funny thing happened on the way to no one remembering Simpson-Bowles and opting against trimming earned benefits like Social Security or Medicare. The budget deficit is no longer a problem. Indeed, not only is the total amount less than what it was before the Great Recession, but because our economy is larger, it is also even less as a share of our GDP. Indeed, at 2.5% of GDP, our current deficit is less than the modern historical average and a half-percent below what economists think appropriate for sound fiscal policy. 

Of course, we have seen this movie before. When Bill Clinton inherited a massive budget deficit after 12 years of runaway deficit spending by Reagan and Bush, he passed a tax increase on the wealthy, reined in government spending, and the economic boom resulted in a flood of tax receipts that left a $236 billion surplus when he left office. Barack Obama and the Democrats passed the American Recovery and Reinvestment Act and the Affordable Care Act, invested in research and development, saw unemployment plummet, and passed a teensy-weensy tax hike on the top 1%. The reductions in health care spending, the increase in tax receipts from an improving economy (and stock market), and marginal cuts to federal spending have all helped drop the deficit by almost 75 percent from its 2009 high. 

Why the Beltway media continues to fall for the Republican trope that they are the fiscally prudent party while the Democrats are shameless spendthrifts is beyond me. We now have 35 years and five Presidents of proof that Republican Presidents spend like teenagers with their parents' credit card and leave it to Democratic Presidents to pay the bill. 

But the ho-hum, Obama-cut-one-trillion-from-the-deficit shoulder shrug emoji from the Beltway media is really disappointing.

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  1. The budget deficit is so low because of the sequester. And the sequester is making sure that health education and welfare are inadequately funded and people are suffering as a result. The deficit hawks are silent on the deficit because at the moment they are winning.

  2. The reduction in the deficit is, in part, due to the sequester, but just that - a part. It is also going down because tax revenue is up (in part because of the tax hike on the wealthy in 2013, in part due to more revenue from capital gains and in part because employment has rebounded). Also, deficit hawks are not silent, the spin on this story from hawks is basically "yes, the deficit is down now, but it's about to go back up because of the explosion in entitlement spending." Of course, the response is some combination of lift the FICA cap and fund Social Security basically forever, that Medicare spending is down (thanks in part to the ACA), and since when do we worry about problems 15 years from now?

  3. Imagine how small the deficit would be if American workers were paid well, or just paid at their current rates for every hour that they actually work, as opposed to the status quo, in which many hourly employees work some hours uncompensated and/or their time cards are falsified.

  4. Imagine how small the deficit would be if American workers were paid well, or just paid at their current rates for every hour that they actually work, as opposed to the status quo, in which many hourly employees work some hours uncompensated and/or their time cards are falsified.

  5. TK,

    I tried a gross comparison of federal deficits as a proportion of GDP for 1998-2014 (the years for which I could readily get US GDP figures)

    Take a look at this OMB page and grab Table 1.1:

    I found a series of GDP growth figures here:

    under "The development of the United States' GDP according to World Bank:"

    I used 1998 as a benchmark and established the ratio of that year's surplus to GDP = 1000

    (1998 surplus)/(1998 GDP) = 1000

    Then averaged these ratios as follows - roughly corresponding to presidential administrations:

    1998-2000 - 3-year average surplus/GDP ratio: 1950 (on average, a surplus roughly double the 1998 figure)

    2001-2008 - 8-year average surplus/GDP ratio: -5150 (on average, a deficit 5X the 1998 surplus)

    2009-2014 - 6-year average surplus/GDP ratio: -11400 (about 11X the 1998 surplus)

    As you pointed out the OMB table confirms that deficits are shrinking every year since 2009.

    Posit deficits of 300-billion/year for 2015-2016 and 2.5% GDP growth (same as 2014), the 8-year average will be 9300 or 9X the 1998 surplus.

  6. Obviously, you could find a larger series of US GDP figures and run a broader comparison (Clinton would look slightly less good - but much better than his successors). Or perhaps try averages with a one-year lag (1998-01, 2002-09, 2010-14) and see how that pans out.

    I'll offer you the GDP growth series 1999-2013 (% separated by tabs):

    4.8 4.1 1.0 1.8 2.8 3.8 2.8 3.0 2.6 0.3 -2.8 2.5 1.6 2.3 2.2