Shrinking Deficit

We have been bombarded for the past few years by an endless stream of analyses, diatribes, and invectives about the horrors associated with the Federal deficit. The tide of red ink that began to flood Washington at the end of the Bush administration and which has abated only slowly under Obama became a feature of the great political stand-off that has frozen policy making and disrupted Congress since 2009. In response to the yawning gap in the nation’s finances politicians, academics, the media, think tanks, and sundry hangers-on all felt the need to opine on the merits and demerits of a deficit that peaked at 10.1% of GDP back in the darkest days of 2009.

We have been treated to a variety of sober plans to slash it back in the name of preserving the nation, avoiding a burden on future generations, and restoring the full faith and credit of the government. Folks like Alan Simpson and Erskine Bowles have re-emerged from obscurity to become stars amongst the cognoscenti the membership of which was limited to those who saw the dangers of debt and advocated astringent urgent remedies.

We became used to being told that we could no longer afford the goodies we wanted. That Social Security needed “saving”. That Medicare was a looming disaster, and that in our newly diminished state we all had to tighten our belts, forgo nice things, and suffer the consequences of austerity. This was the new America, austere, harsh, but with balanced books. Our creditors would love us. Confidence would flow, and eventually the tide of red ink would be replaced by one of business, industry, and – perhaps – a recovery in employment.

Perhaps the most enduring images of this discussion were the various budget proposals put forward by Paul Ryan. He shot to fame from nowhere because his ideas were deemed a serious conservative alternative to the left’s older, and deemed tired, economics built largely on a Keynesian foundation. Since the right’s leading economic ideas were the root of the crisis, conservatives and self-styled centrists alike were desperate for a new hero who could be the anti-Keyenes. Ryan adroitly fit the bill. That his plans were a sham and didn’t even add up was never a concern. What mattered was that he advocated a solid dose of puritanical, morally uplifting, austerity designed to wean us all off of the government’s largesse.

So the deficit debate turned into one about the size and scope of government. The Republicans managed to exploit the gloom and angst over the rising debt by using it as a bargaining chip. They threatened to shut down the government. They threatened to renege on the national debt. They opposed all and every measure proposed to lift the economy, unless said measure was attached to the introduction of “vital” austerity. As a result, Washington lurched from one political crisis to the next. The economy languished. And we became stuck in a surrealistic stand-off with each and every offer advanced by Obama being rebuffed, even if it embodied austerity measures hated by his own supporters.

And then …

Something funny happened.

The deficit began to melt away. Not completely, but enough. Just like some of said it would. The vast drop in revenues and the equally vast jump in spending that happened because of the drop in economic activity in 2008 was cyclical. It was always going to go away if, and when, the economy came back to life. Which it has done. Just enough to make a big difference in the deficit.

Yesterday the Congressional Budget Office (CBO), the bipartisan referee of Washington facts and figures, published its revised budget outlook. It makes for startling reading.

The deficit is expected to shrink to a mere 2.1% of GDP by 2015. That’s below the 2.4% average for the forty years ending in 2008 before the crisis erupted. Not only that, but the deficit is now projected to be only 4.0% of GDP this year, weighing in at $642 billion. This means that the rapid upward tilt in the debt to GDP ratio that we had been warned would ruin us all is now set to sputter to a halt and even turn down a little. Instead of hurtling across the dreaded 90% cliff of doom – recall Reinhart and Rogoff’s infamous paper – the debt ratio will hover around 71% for the foreseeable future.

In short the panic is over. The deficit is under control. The debt ratio is high but just fine. We can relax.

We have no deficit problem.

This should make us all happy, right?

Well not really.

I think the deficit is too small. We have shrunk too fast too soon. We have drawn too  much demand from the economy before it was able to hum along without government help.

But that’s for another day.

The fun result of the CBO report is to watch all the austerity advocates scurry around to find new things to worry about, and new ways to justify inflicting pain on the poor, the sick, the young, and the less well off. After all, what’s a conservative to do if there’s no budget war to fight?