The Mystery of the Incredible Shrinking Budget Deficit

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The Obama Administration is having pretty much the worst week ever, but somewhere amidst the fog of scandal lies some pretty good news about the budget deficit, namely that the Congressional Budget Office (CBO) is predicting it will be much smaller in 2013 than was projected just a few months ago.

That’s right, the federal budget deficit, which topped $1.4 trillion in 2009, or 10.1% of GDP, and dominated the political discourse over the past several years, is shrinking rapidly. The CBO is now saying that the deficit will be less than half that amount in 2013: $642 billion, or 4% of GDP. That’s $200 billion less than the CBO predicted just a few months ago. What gives?

(MORE: This Housing Upturn Looks Like the Real Thing)

Basically, the change can be explained by a combination of a recovering housing market — which has improved the finances of government-owned Fannie Mae and Freddie Mac — combined with a better-than-expected economy overall, which is boosting corporate and personal income tax revenues. This economic improvement is happening despite higher taxes and budget cuts enacted as part of the fiscal cliff deal reached in December, and the sequestration-related budget cuts that went into effect recently.

This change is yet another vindication of economists and commentators who argued that large budget deficits are the natural outgrowth of effective economic policy in the wake of a severe recession. Economic recession reduces employment and corporate profits, lowering tax revenues. At the same time, safety net programs like unemployment insurance and food stamps must spend more to accommodate the larger number of people who need them.

Congress and President Obama did take measures to permanently increase taxes and government spending through the healthcare overhaul, but it’s clear now that the historically large budget deficits we saw immediately following the financial crisis were mostly a result of the recession rather than new government programs.

In addition, the CBO notes that the growth in healthcare spending has slowed in recent years. For instance, spending on Medicare and Medicaid in 2012 was 5% below what the CBO predicted it would be in 2010. In a response to this slowdown, the CBO has reduced its estimates for the growth of such spending, projecting that those programs will cost $225 billion less than previously thought over the next ten years.

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That being said, none of these improvements change the hard reality that after 2023, spending on so-called entitlement programs will continue to rise faster than the payroll taxes which support them. Federal debt — that is, the accumulation of the government’s annual deficits, which must be financed with borrowing — relative to the size of the economy is expected to stabilize over the course of the next decade, but then begin to rise steadily thereafter.

Ideally, this temporary reprieve of the declining deficit should create enough breathing room for Congress to have a mature conversation about how to address the longer-term problem. A decade from now, taxes will have to rise above their historical norm, or benefits to future retirees will have to be cut. Likely, some combination of the two will have to be enacted. Crafting a solution will of course be politically difficult, but the CBO report shows that it need not be done under duress.

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81 comments
sethwrkr
sethwrkr

Less government is the answer to the problem.  Who is John Gault?

Onepatriot
Onepatriot

All the jumping up and down and running in front of the cameras the republicans are doing about things that have nothing to do with the economy would be funny if it weren't a symbol of their "lost" party.  If they cared about our country instead of appeasing  people like Rush Limbaugh, they'd be working to help this President get more people back to work.

XiraArien1
XiraArien1

Of course it will be done under duress. They'll ignore it until it becomes a major problem, then use stop-gap solutions as long as they can, THEN they will deal with it when it's absolutely unavoidable.

That's how they've 'dealt with' everything else over the last 30 years, i don't see that changing.


http://llltexas.wpengine.com/

joanxis
joanxis

Hey Jack, What's all this about education? Sounds as if you're saying that if people disagree witth you, they are uneducated.  That's a pretty ignorant belief.  You have no idea how educated people are on this site.  Methinks you feel better than others.

GEORGESFCA
GEORGESFCA

The bottom line: all of the federal reserve moves and deficit spending were meant to ease the 1/2'ng of personal wealth in this country because of the housing crisis, and to allow time for the government to create meaningful changes to long-term structural problems in the economy.  The first has happened, the latter has not.  So the fall has been somewhat cushioned, but we are facing an enormous financial crisis due to Congressional inaction on fixing entitlement programs, reducing defense spending, and fixing social security.  My vote: call a Constitutional Convention and revamp the government.

TomSmith1
TomSmith1

Reduce the military budget by 200 billion dollars an year and we would still have by far the largest military budge in the world. Stop attacking other countries and we would not need so much money to fight terrorism as no one would want to attack us. Do that and the deficit, debt, etc will all disappear within a few years. America used to have a very small military budget before world war 2 in spite of threats because if need be, the entire nation could be galvanized and fight and that's what it did and we won because we were on the right side but attacking other smaller weaker countries (weather it's drone strikes, missile strikes, air strikes, invasions, or whatever) makes us be on the wrong side and also makes us less safe because for every person we kill (and most of whom we kill are innocent bystanders anyways), we create 10 more who want to kill us and no matter how much money we spend to fight terrorism, we can't succeed in preventing it 100% of the time as the 9/11 and Boston attacks clearly show.

TomSmith1
TomSmith1

Reduce the military budget by 200 billion dollars an year and we would still have by far the largest military budget in the world. Stop attacking other countries and we would not need so much money to fight terrorism as no one would want to attack us. Do that and the deficit, debt, etc will all disappear within a few years. America used to have a very small military budget before world war 2 in spite of threats because if need be, the entire nation could be galvanized and fight and that's what it did and we won because we were on the right side but attacking other smaller weaker countries (weather it's drone strikes, missile strikes, air strikes, invasions, or whatever) makes us be on the wrong side and also makes us less safe because for every person we kill (and most of whom we kill are innocent bystanders anyways), we create 10 more who want to kill us because no matter how much money we spend to fight terrorism, we can't succeed in preventing it 100% of the time as the 9/11 and Boston attacks clearly show.

mantisdragon91
mantisdragon91

Here is an even bigger mystery. How can anyone in their right mind believe the GOP economic policies favor anyone but the top 2 or 3%?

JamesDymek
JamesDymek

Here is a solution to solve Social Security deficit in the future. Our government should transfer ownership of Fannie Mae and Freddie Mac to the benefit of the Social Security Administration and all future proceeds from dividends should be used to pay benefits. Some of the current government debt could be eliminated by this asset transfer on an accounting basis. This would lower the debt owed to social security and create another income stream besides social security taxes. Maybe the government can chip in the remaining GM stock as well. Chew on it and discuss - it could work.

EarlHickey
EarlHickey

it's magic.  it's a miracle.  Poof!  no more deficit.  can i get the magic words to use on my credit card balance?

AndyLivefyre
AndyLivefyre

All about cutting sequestration-related items

AdolfSchmidt
AdolfSchmidt

Any improvement, if you can call it that, is from increased oil exports. The present administration had nothing to do with it. We have the largest oil reserve in 82yrs. Even though the price of oil has been dropping, that has not translated into lower gas prices. Someone's getting rich(er)!

venturen
venturen

Wow the FED prints Trillion dollars and all it got was a $625 Billion deficit which goes to a Trillion by 2025. Wow are Bernanke and Obama just AWESOME. Wall Street makes billions while main street pays the bills! 

targa83
targa83

look Squirrel..

or taking comfort that your 14 yr old is just having one baby..

not twins..

there's next yr..

cause she surely didn't her lesson....

.

MarcosAnderson
MarcosAnderson

So, instead of being stabbed 10 times in the face last year, I will be stabbed only 6 times this year.

"Winning!" - Charlie Sheen

Innocentious
Innocentious

Wow... Okay I have to say this article is simply... ignorant. Look over the past 4 years we have been deficit spending $1 Trillion a year. The short fall in revenue was due to a huge increase in spending in 2008/2009 that was WELL above where we would have been for well until two years from now on a base line budget. According to figures there are what 11 Million people still unemployed and we are only trying to reduce this to about 8 Million before the unemployment level is considered healthy? At the Media Income level this is only $150 Billion a year of additional money moving in the economy. The Federal Reserve is doing this in two months. So if the Federal Reserve for two months of their QE bond and mortgage backed security purchases were to simply employ people as street sweepers we would be in the green.

(P.S. This is ridiculous but so is this articles fawning over the administration )


sethwrkr
sethwrkr

@Onepatriot 

By increasing taxes and regulation?  Good luck with that.  Who is John Gault?

JackHollis
JackHollis

@TomSmith1 Tom, while I am sure you are concerned I do believe that if we listened to people with educational levels comparable to yours we would soon end up a third world country.  I don't have much respect for our politicians but I do know that WWIII will last only a little while and there will be no room on this planet for the second place participant. Now if you are in favor of suicide, be my guest but don't take us all with you.

sethwrkr
sethwrkr

@mantisdragon91 If GOP policies are good for business... and you work for or would like to continue working for business, then...

PEric70
PEric70

@mantisdragon91 Conservatives aren't in their right mind. They're in the paranoid, conspiracy riddled dungeon of make believe, a universe occupied by lies, distortions, fabrications, and the shrieking echo chamber led by Rush, Hannity and Beck. Facts are irrelevant.

JackHollis
JackHollis

@mantisdragon91 Only those with a good education and the ability to think for themselves and not take up the talking points of the DNC can believe in the conservative policies.  I see that leaves you out.

JackHollis
JackHollis

@JamesDymek  One of the original selling points of Social Security was that the money would be invested and grow from it's investment.  We all know, or at least should know, that during the Johnson administration the SS money was transferred to the general fund to help pay for the Vietnam war and hide the massive deficit sending.  The result of that is that the money never earned any income.  It was established in a way it would have worked but the politicians have never been able to contain their greed andthe need for more and more money to spend.  A million here, a million there, just chickenfeed, to everybody but you and I.

JasmineH
JasmineH

The total size of the sequester is $85B per year.  Sorry, not even close.

JackHollis
JackHollis

@nstaley401 Are you sure?  I think that people  who have to read the third grade level of explanation of the debt and deficits still will have no idea what they are looking at.

JasmineH
JasmineH

Wow dumbest post ever. Oil companies are not nationalized in the United States.

JackHollis
JackHollis

@AdolfSchmidt I am sure that your overpaid government politicians are looking out for your interests.

hmsmark
hmsmark

@AdolfSchmidt What?  Oil exports?  If the US is exporting oil, the federal government doesn't make any money off it.  It goes to the oil company.  Sorry Adolf... horrible name by the way.

greyngold
greyngold

@AdolfSchmidt Really. 200bil in increased oil exports? Got a citation? Of course you don't, because its not the actual reason. 

hmsmark
hmsmark

@venturen Yaaaaawn.  They're printing money (not really, but there's a kernel of truth in what you say)!  The currency will collapse and the world will end.   Better buy gold.  Oh wait, gold has lost $350 of value in the last couple of months.  Well, there's a black president, so somethin' bads gonna happen.

JasmineH
JasmineH

Or stabbed ten times, but with a significantly smaller knife.

tom.litton
tom.litton

@Innocentious Of the "huge increase" in spending, some of it was the stimulus (and temporary, it was a one shot kind of thing).  Much of it was an increase in things like unemployement insurance, food stamps, etc.  But a large part of it was a decrease in revenue (ie not spending at all).   If you have evidence to the contrary, then i would like to see it.

I have no idea where your getting the 8 million unemployment number?  Do you have a link?  I do know that full employment isn't 0 unemployement.  There will always be some turn over (something like 4-5% unemployement rate).   

The federal reserve is putting money into the system to keep long term interest rates low.  They aren't spending it.  You *may* (i haven't checked) only need $150 billion a year of actual further transactions, but unless you get congress to actually hire those people and pay them (or at least businesses to borrow money from the banks and hire people), then it doesn't mean anything. The money just sits at the banks waiting to be spent.

Plus the federal reserve will need to take that money out of circulation eventually or there will be inflation.  

mantisdragon91
mantisdragon91

@JackHollis @TomSmith1 Second place participant? We spend more on defense than the next 10 countries combined. Who is it exactly that our military is incapable of rolling over based on even a fraction of current spend?

JasmineH
JasmineH

In general I have found that people of education are able to articulate a reasoned argument by connecting points together logically.  What you have done, Jack, is simply say "you're wrong because you're a stupidhead."  This leads me to believe that, if you are in fact educated, you were probably educated at Pat Robertson university or some other religiously affiliated institution with questionable accreditation.

mantisdragon91
mantisdragon91

@JackHollis @mantisdragon91 Judging by the fact that conservative policies are based on studies using fudged numbers(Reinhrat/Rogoff study), neither a good education or the ability to think for themselves is actually needed or utilized.

JasmineH
JasmineH

HA HA HA HA


Jack you're obviously completely ignorant about a lot of things, including the way social security works.  Social security taxes have NEVER been invested for future generations, from DAY ONE.  The money you pay in goes immediately to recipients in the older generation.  Always has.

If it happens that social security receipts exceed outlays, the excess is required, BY LAW, to go into the social security trust fund, in the form of treasuries (a.k.a. t-bills).  When outlays go up and receipts go down, the SS administration can then sell the t-bills back to the government.  Social security does not work like a savings account or like a 401K, as your cartoonish view of the world might suggest.


sethwrkr
sethwrkr

@hmsmark @AdolfSchmidt Well if a company were exporting oil and making money... presumably it would result in increased tax revenue for the govt.  Of course that is not the reason for the current reduction in deficit from ridiculous to merely concerning.

Innocentious
Innocentious

@tom.litton @Innocentious 

Between 2007 and 2009 Spending increased $790 Billion ( as a per year budget ) the same amount that it increased between 2001 and 2007 ( actually it was on $720 Billion between those years ) but we should just have passed where we are in Budget this year had it been growing at the rate it was 2001 to 2007. Which of course had been accelerated due to the War on Terror under Bush anyway.

The Federal Reserve cannot hire people to fix the issue ( I said it was a ridiculous proposition just like I think the article is ) they are investing at things at horribly low interest rates so the money does NOT enter the real world monetary system. However the money has now trickled into the investment portion of banking again. ( hence the high stock market values - or if you will financial inflation lol ) which has now become a better investment than the low yield bonds due to this fact and which is why Banks earned huge sums of money... again. Where they had low yield risk on high yield stocks, and why not if the thing collapses again we know what will happen lol...

As for the number of people needed to be employed it is simple math. 7.6% unemployment where we have 11.7 Million unemployed people means 'full' employment is 153.95 Million people seeking or gainfully employed means that to reach the full employment level of the Fed is 10 Million people still unemployed - But I pushed it further than that to the 'boom times of 5.5 % ) and took the median household income of $50,000 a year and said, hey we only need $150 Billion in the economy to reach full employment. Heck if you went with the Fed's figures of 6.5% we only need $85 Billion to be at full employment.

Of course we all know that this number is artificially low as the labor participation rate is lower now than it has been since the late 70's, but this is simply a thought experiment. Now lets say we reach full employment And that those people will be paying taxes to the Federal Government. That will only bring in an additional $17 Billion in revenue. Hardly enough to bridge the gap in the deficit. So where in the world are we going to get the extra money to do so?

Well if you had been paying attention to WHY there is a great deal more money in Government coffers it is because people took money out of investments... A lot of money out of investments, in late 2012.  The budget for the Federal Government Begins and ends in October. It was a one time event, so yes this fiscal year we should see a lowering of the deficit however we should see it increase next year by about $50 Billion. Barring things don't go awry between now and then. Which I do not foresee, the next bust cycle should occur in late 2014 or mid 2015. However since everyone is playing fast and loose with their currencies we will have to see.

Now as far as Austerity in Europe, sigh, look Greece has to have Austerity or else no one will lend to them. The EU is no where near unified enough to have a common central bank that would not cause horrible, horrible repercussions in the devaluation of the Euro. The main issue with Greece, and to be honest MOST western nations is that the Government has become 50%+ of the economy. Now you can say Government picks up the slack when the private sector has a down turn, and normally I would be in agreement with you. But in this case it simply cannot work. In point of fact I would suggest that the main issue in Greece is not the Austerity but the crippling taxes, which for whatever reason gets completely overlooked by not fitting the narrative of the liberal economists.

As far as teh USA goes. The economy is improving  but there are so many fundamental weaknesses it is not even funny. I again would point to oil and gas being the main drivers or 'recovery' seconded by the high stock market creating a false sense of security right now. We are riding a bubble up, I do not know how big it will get but I am very worried because the investment scenarios that I am looking at are not sound.

JasmineH
JasmineH

He's using Cold War thinking.  It's a common military problem, fighting the last war instead of the next war.

The next war is on terror, not on the Soviet Union, which (thanks in part to Reagan) we have already won.  Not by killing them but by bankrupting them.  Too bad we're bankrupting ourselves now.

Diecash1
Diecash1

@sethwrkr @JasmineH You are incredibly dim.  There never was a SS "lockbox" to raid.  Precisely where do you think any excess receipts would go?  Under a mattress?  The excess is placed into the general fund and and the SS trust fund receives treasury bonds -- the most secure investment possible.  When necessary, those bonds are redeemed to pay SS benefits.

sethwrkr
sethwrkr

@JasmineH Why not... if you actually received a decent rate of return for your investment.....

sethwrkr
sethwrkr

@JasmineH Jasmine... except the ss lockbox has been raided for regular spendeng... leaving only IUs.  Seems like, you have a rather cartoonish view.....

JasmineH
JasmineH

My point, Bryan, is that it was never an "original selling point" that SS funds would be invested and you'd have a nice nest egg with interest when you retire.  The entire notion is absolutely ludicrous.  Thanks.

bryanfred1
bryanfred1

sorry - "are NOW permanently on the deficit side..."

bryanfred1
bryanfred1

We ran surpluses (which Jack rightly notes were spent - there is no 'trust fund' in the way people normally think about it) until just a few years ago and are not permanently on the deficit side of the coin.  Out of curiosity, where do you think the money comes from to buy back those treasuries?  Either new taxes or issuing new debt to pay off the bonds held by SS.  Either was it's a real cash need - SS recipients are getting cash, which doesn't appear from thin air.  Just because Treasury and SS are separate departments, they all ultimately are under the umbrella of the same federal government.

bryanfred1
bryanfred1

The one thing we should all do is see what happens the rest of this year before making any long-term predictions.  There was a huge amount of capital gains taken at year-end to avoid the tax increase, and those collections came in this year.  That's a one-time phenomenon, but the CBO and other gov't agencies use static projection models.  I'm not sold this is a permanent situation. 

JackHollis
JackHollis

@DeweySayenoff @tom.litton @Innocentious   The deficit will still exceed 1 trillion dollars and they will have to raise the debt ceiling once again by Sept. to keep us from going into default.  Your mind was a terrible thing to waste.