Seven Reasons Why You’re Not Hearing So Much About the Budget Deficit These Days

January 31st, 2014 at 4:17 pm

First of all, because the damn thing has fallen so much (i.e., the deficit as a share of the economy).  Here at CBPP, everybody’s all “fiscal year this” and “FY that…”  But given that we just yesterday got GDP for 2013, I’m all like walking around the halls saying, “hey, anyone want to see calendar year (CY) deficit to GDP ratios?  They’ve fallen even faster than the FY ones!”

The figure below shows the decline from an historically high 10.2% in 2009 to 3.3% in 2013 (the fiscal year changes are from 9.8% to 4.1%).  That represents the largest four year decline in well over 50 years.


Source: Treasury, BEA

–Second, it’s what you’d expect.  Though DC went maniacally hair-on-fire about the deficit, it’s supposed to temporarily expand in recessions and come down in recoveries.  In fact, it shouldn’t come down this fast.  That’s called austerity, and it doesn’t work, if “work” means help the macroeconomy recover from recession.  Economists of pretty much all stripes bemoan the estimated 1.5 ppts that fiscal drag sucked out of the 2013 economy, and are looking forward to fewer such headwinds this year.

–Third, that decline in the figure is the partially the result of trillions in spending cuts and tax increases (mostly the former).  Last I checked, policy has generated about $3 trillion in cuts, with about 70% coming from spending cuts (80% if sequestration had stuck, which it still could post-2015).  That doesn’t mean that our fiscal work is done, as I’ll return to in a moment, but it is what’s behind the austerity of recent years.

Fourth, the deficit hawks’ prophecies of near-term doom have not materialized.  They argued that the deficits would trigger interest rate and inflationary spikes, runs on our currency, boils, and worse.  The opposite occurred in every case (not sure about the boils–am sure about the rest).

–Fifth, the politics of deficit reduction haven’t helped anyone.  I don’t know this, and I could be wrong, but if you polled people and asked them: has the deficit worsened under Obama?, I’ll bet most would say, “Absolutely!” (Apparently, polls show that people think Clinton left office with deficits–he left with surpluses.)  I think neither the President nor anyone else have gotten any love from the electorate because of the pattern on those bars.  And that includes Republicans shut down and default tactics over the debt.

–Sixth, health care costs have slowed considerably and that’s reduced—though far from eliminated—one of the true sources of out-year fiscal pressures.  As my CBPP colleague Paul Van de Water shows, both Medicare and Medicaid are expected to cost the government $1.2 trillion less over the next decade than was earlier forecasted.

–Finally, and this relates to reason #5, a deficit-to-GDP ratio of 3.3% creates oxygen for talking about the more immediate challenges that people actually face, including job growth (to which deficit reduction in recent years has been antithetical), opportunity (the topic of both the President’s State of the Union and the Republican response), and earnings.  If there’s anything good that came out of the austerity pattern shown in the figure, it’s the fact that both parties are now starting to argue more about how we can achieve broadly shared prosperity as opposed to “grand bargains” (tax increases and cuts to social insurance).

Of course, there are still a) deficit scolds bemoaning their Cassandra-like fate, and b) long-term, serious budget challenges that will require both higher revenues and diminished spending, particularly in health care.  I stand by my conviction as a CDSH (cyclical dove, structural hawk).  But the key point is timing.  Where DC’s thankfully-fading-but-formerly-acute case of deficit-attention disorder went wrong is not that the deficit-to-GDP ratio fell so much.  It’s that it did so at precisely the wrong time.

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6 comments in reply to "Seven Reasons Why You’re Not Hearing So Much About the Budget Deficit These Days"

  1. Fred Donaldson says:

    8. NY Times notes: “Morgan Stanley announced Tuesday that Erskine Bowles, who has served as a director of the board since 2005, had been named as lead director. Mr. Bowles will replace C. Robert Kidder, effective Feb. 1.”

    9. Maybe the law business is improving: ” Simpson is a partner, along with his two sons Colin Simpson and Bill Simpson, in the trial lawyers law firm Burg, Simpson, Eldredge, Hersh & Jardine, P.C., headquartered in Denver, Colorado,” Wikipedia notes.

    Even Ed Rendell has been quiet recently…

    But, Politico reports there is at least one very vocal defender of cutting earned benefits: “Neither party wants to talk about it,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “This is the first time we have been staring into the political horizon and there is no action-forcing moment.”

    Love those “action-forcing” moments, or did she really mean “never neglect to take advantage of a real or imagined crisis.”

  2. Larry Signor says:

    Deficit reduction and second tier austerity are both problems that will still generate considerable and intended headwinds, for years to come. The American people are getting tired of macro because DC has no appetite for engaging the less fortunate. What does macro mean, if not ALL of us? Most Americans don’t even think “we chopped liver”. Who “gonna give a job to old Slim Carter?”. I have to agree with Professor Reich ;

    ‘At some point, working people, students, and the broad public will have had enough. They will reclaim our economy and our democracy. This has been the central lesson of American history.

    Reform is less risky than revolution, but the longer we wait the more likely it will be the latter.

    • R. Nemo says:

      Wish it were true. Americans are apathetic and have internalized their own oppression. Revolution is just a rhetorical term–never actually happen in the next 50 years! Prosperity is still too high. Yes, people are suffering; but compared to most places on earth it is only mildly bad. Look a the election forecasts. Republicans to take the senate and hold the house. No revolution there.

  3. Robert buttons says:

    I think the idea that govt stimulus is actually stimulative has been throughly debunked by the failed unemployment predictions of Romer, et al wrt the Obama stimulus.

    A layman looking out over the economy can easily see we have $17T in failed “stimulus”. If you are the academic sort, I’d recommend Cogan and Cwik’s elegant paper.

  4. R. Nemo says:

    The irony is that the Tea-baggers stopped Obama from his stupid “Grand Bargain.” There is no need to cut entitlements! They need to be increased. Taxes on the rich need to go up to the French levels(70 plus %). Society needs to share the burden. The rich need to be forced to live in society; not live off of society as they currently do. Obama is a loser on that issue too. Yes taxes have been raised a bit; but nothing compared to what needs to be done.