Getting Comfortable With The Deficit

An interesting sentence from a Bloomberg editorial praising President Obama’s speech yesterday.

The Congressional Budget Office projects that the 2013 deficit will decline to $642 billion, just 4 percent of gross domestic product and down from 10 percent in 2009.

Just a little bit of context. First off 2013 may have been an outlier. Tax increases, particularly increases in capital gains taxes, pushed some income recognition into 2012 with the expected gusher of tax receipts this year. We experienced a similar blip in 1987 as the tax reform bills of 1986 eliminated tax shelters and folks cashed out to beat the new levies. You can see the surge on this graph from FRED.

FRED Graph

Second, deficits equaling “… just 4 percent of gross domestic product…” aren’t anything to crow about or be comfortable with. Once again from FRED an historical look at deficits.

Graph of Federal Surplus or Deficit [-] as Percent of Gross Domestic Product

We are still well outside the historical norm and operating at a rate which isn’t to the best of my knowledge considered prudent. Keep in mind a couple other points. The 4% number is a projection it isn’t real yet, interest expense is historically understated given the Feds policies and the sequester shaved off some of the deficit but its effects will start to wane.

There’s been a lot of progress with respect to the Federal deficit, but we are still in fairly dangerous territory and we don’t know yet the true extent of improvement nor how sustainable it will prove to be. Using spurious comparisons of metrics during the recession to now paints a falsely rosy  picture and is not a logical argument for opening the government spigots once more.

 

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