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Why No One Is Celebrating CBO's New And Much Lower Deficit Estimate

15 May 2013
Posted by Stan Collender

There was a time when a $200+ billion reduction in the federal budget deficit would have been big news and hailed as a singular achievement worthy of either fiscal sainthood or a dance-on-the-table party...or both.

Yet yesterday's Congressional Budget Office report showing that the fiscal 2013 federal deficit will be $642 billion, $203 billion less than CBO's previous estimate of $845 billion, did not create any spontaneous cannonizations or celebrations. It also didn't change the still-stalemated and crisis-oriented federal budget debate by even a small amount.

The bottomline: It's in almost no one's interest to be happy about the budget news that should have made everyone happier.

Here's why.

1. The $642 billion estimate is indeed an overwhelming reduction from the 2009 $1.4 deficit and a substantial change from CBO's February projection. But it is also $642 billion more than no deficit at all. That means that all sides in the budget debate will still be able to use even this much lower number to "prove" whatever point they were making before the new estimate was released.

2. The White House couldn't take a victory lap because anything it said would have been mischaracterized by congressional Republicans as the president supporting a $600+ billion deficit.

3. Even though they could take some credit for keeping the sequester in place and, therefore, lowering spending, the congressional Republican leadership couldn't take a victory lap because that would have been taken by some tea partiers as an indication that the speaker and majority leader were not going to demand additional reductions.

4. There's anything but universal agreement among economists that reducing the deficit in the current economic environment is the right fiscal policy and, therefore, that the reduction in the deficit is good news. Given the still-slow corporate and consumer spending, the continuing cutbacks by state and local governments and the continuing economic problems around the word that are limiting trade with the U.S., Americas austerity-like fiscal policy that has been in place for several years may well be the exact wrong plan at this time.

5. The year-by-year deficit is quickly being replaced by the national debt as the number one fiscal issue. This isn't surprising: the deficit is falling while the debt is rising and the deficit is in billions while the debt is in trillions. The fact that CBO projects the debt will soon be in a range that most economists would call insignificant makes no difference when the multi-trillion dollar debt sounds so scary.

6. In the wake of the report, the deficit hawk groups are still saying that the deficit is as much of a problem as it was before and pushing for a grand bargain. This too isn't a surprise. After all, these groups would have less reason for being and far less ability to raise funds if the deficit didn't exist as an issue.

7. Although the CBO forecasts show the deficit falling from 2013 to 2015, it also shows it rising in nominal terms each year thereafter. Even though that is far less meaningful than the deficit as a percent of GDP, which stays in the low 3.5 percent range, it still allows everyone to cherrypick the results that best "prove" what they want to say.

So...Do the new CBO numbers mean that there won't be a fight this fall over the debt ceiling and a continuing resolution? Absolutely not.

I agree with your read of the

I agree with your read of the partisan dynamics, Stan, but it's too bad that we can't acknowledge this as a positive development. For those who are truly fiscal conservatives (and not just political "deficit hacks"), it should be good news that we have reversed the longer term trajectory of deficits without killing the recovery. For people who want the Federal government to have some room for infrastructure development, research, or jobs programs in the medium term, it takes wind out of the sails of the austerity crowd. Those who think we've put too much pressure on an accommodative monetary policy, this gives the Fed some fiscal space to pre-empt potential future inflation. And even the long term bulge in entitlement spending is less daunting if we are in a stronger fiscal position 7-10 years from now. To me, this is a pragmatic, "good government" result that has a lot of benefits, even if it is far from optimal policy.


CBO Projections

The projections are always done as line graphs, but would there be value (or it is even legal) in having CBO to show their projections as ranges of possibilities. For example, projection A has an x% probability while projection B has a y% probability.

Pardon the old joke, but the hard part about predicting the future is that it hasn't happened yet. Looking back these projections are always off for some reason and are based on predictive models where a tenth of a percent here or there had enormous impacts over time. So would showing these as likely ranges be helpful or hurtful?


Difficult To Brag About This

If a pol brags about cutting the deficit, someone will ask how. Nobody wants to brag to voters that they cut the deficit by raising FICA taxes on their wages and implementing the imbecilic sequester.


Treasury numbers don't support the claim

It could be argued that the deficit reduction spin is typical hand waving / smoke and mirrors. Did anyone do any diligence in reviewing the actual numbers from Treasury?

To these eyes, the deficit for this year will be over a $trillion....same as last year.

http://www.treasurydirect.gov/NP/debt/current


There is indeed smoke and mirrors at play here

A confluence of temporary factors are helping to reduce the deficit:

1. Fannie Mae's "profits" (debunked by James Hamilton over at econobrowser and others in the blogosphere as an accounting trick)

2. Higher tax revenue due to seasonal and other factors (some took capital gains last year in anticipation of higher taxes, and the bill just came due.)

3. Some dodgy accounting on the part of the treasury ... the DTS "debt to the penny" shows a much higher deficit than the monthly report

No doubt there is some real effect of reducing the deficit via higher taxes and reduced spending (sequester.) That should be celebrated not ignored.

However the fact that we can't account for things in an honest fashion without resorting to the kind of tricks that got Jeffrey Skilling a long jail term doesn't help things either.


not cause for celebration

Could not disagree more with the folks who say reduced spending from the sequester is something to celebrate. Cutting National Parks spending is a disgrace, furloughing federal employees reduces services and is also kicking around decent people, cutting unemployment benefits is cruel to people who have worked and are now out of work. So much of it reduces our national growth (because laid-off contractors and furloughed govt employees are not out spending) and our national well-being (let's let the parks and other things be neglected).

It's completely disgraceful and mostly destructive (though like everyone else I'm not sorry about a few programs with cut spending, but on balance very very bad).

Our children would benefit far more from people having jobs now and doing constructive work (at the parks, fighting fires, and repairing infrastructure) than by letting people languish unemployed and keep driving the economy further into a ditch. It is not constructive for people to be sitting on their hands (or wasting all day filling out internet applications and phoning employers) when they could be doing useful work.

We can leave the kids a well-functioning country with people working and parks maintained, etc., or we can leave them a lower national debt. If you look at what is real and what is notional, there's only one good choice -- and it ain't a lower national debt.

Rick Boettger's The Deficit Lie addresses just why the obsession about the deficit is ridiculous and destructive -- even though it was written long ago.


New definition of "cutting the deficit"

In my simple world "cutting the deficit" would mean actually reducing the amount of money the government owes, but here it seems that "cutting the deficit" simply means slightly reducing the rate of increase in government debt.




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