Borrowing Good News on the Deficit?
August 20th, 2009 . by economistmomBloomberg and AP report this morning that the Obama Administration’s latest budget outlook, scheduled for release next Tuesday (same day as CBO’s summer update–watching the PR and press that day will be interesting), will show that they expect the fiscal year 2009 budget deficit to come in $262 billion lower than they predicted in May–at “only” $1.58 trillion, or 11.2 percent of GDP. Cause for celebration? Well, only if you don’t mind “premature celebration.”
Both articles point out that a $1.6 trillion deficit is not really qualitatively different from a $1.8 trillion deficit (both are “humongous”). From the Bloomberg article (by Brian Faler and Roger Runningen):
The deficit figure, as revised, would amount to 11.2 percent of the nation’s economy, the official said. That would be the biggest share since 1945.
“It’s better than we expected but it’s still a huge deficit,” said Stan Collender, a former congressional budget aide who is a partner at Qorvis Communications in Washington.
And from the AP story (By Jim Kuhnhenn and Philip Elliott):
“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition. “I hope no one tries to spin that as good news.”…
“The deficit is obviously very large and a problem,” said economist Mark Zandi of Moody’s Economy.com. “But it’s not quite as bad as what expectations were a few months ago.”
Both articles correctly point out that most of the lower-than-expected deficit is due to a contingency for $250 billion worth of additional financial rescue that had been penciled in by the Administration but was never pursued–not this year at least. In their update, the Administration will reveal that total FY2009 federal spending will turn out to be $345 billion less than they had predicted in May ($3.653 trillion vs. $3.998 trillion). All of the reasons I’ve seen cited for this lower spending have to do with lower-than-expected short-term countercyclical spending–spending on rescues, bailouts, and stimulus–not lower-than-expected spending on our longer-term (ongoing) commitments.
Meanwhile, the Administration will report that total FY2009 federal revenues will turn out to be $83 billion less than what they predicted in May ($2.074 trillion vs. $2.157 trillion). That’s LESS — meaning that the revenue realization is bad news, contributing to a worsening, not improving, deficit outlook. Incidentally, revenues of $2.074 trillion would put them at just around 14 1/2 percent of GDP–the lowest they’ve been since 1950 and perilously close to setting a new post-WWII record low (if they fall below the 1950 level of 14.4 percent). This is more clear evidence that the federal revenue system faces a “crisis” as significant as the crises facing our entitlement programs.
With only shorter-term spending lower than expected, nothing yet accomplished to “bend down the curves” on longer-term spending, and revenues looking increasingly inadequate to fund our short-term and longer-term needs, it’s hard to be optimistic about what the $1.6 trillion (”not-as-bad-as-$1.8-trillion”) deficit really means. What will be an important indicator of how the fiscal outlook has changed since May is what the Administration will show on Tuesday about the deficits in 2012 and 2013–well past the current recession. Are revenues expected to be (more) sufficient by then, once the economy is growing strongly again? Will the “recovery” spending have gone away by then, once the economy has “recovered” and it’s no longer needed? Or we still have a version of “Cash for Clunkers” (or its latest equivalent) going on? And will we still not have passed a form of health care reform that makes the hard choices necessary to really effectively “bend the health cost curve” down? Standards (and the world) have surely changed when we fiscal hawks can “hope” that the previously-projected annual deficits of “only” half a trillion dollars by 2012-2015 (and only worsening after that) will come true.
Those are some of the reasons why I wouldn’t be surprised if the Administration says on Tuesday that their new projection for next year’s (fiscal year 2010) budget deficit is now worse than they previously thought–that it will turn out to be larger than $1.258 trillion (or 8.5 percent of GDP). That’s why I worry that today’s “good news” on the deficit just borrows from what would have been better news about future deficits. I worry this is just a case of “premature celebration.” If anyone is really such an optimist that they’re actually celebrating about this, I mean. 
I have no doubt at all about the President and Congress’s ability to do nothing but make matters worse by dithering, dicing, and cooking the books. The daily “conversation” that goes on in Washington about the economy is clear evidence that when it comes to a choice between fiscal sanity and political expediency, expediency wins every time.
The first and primary question in regards to our budget and the economy is, “Will our policies enhance economic growth?” The answer is clearly: No. It is a fine foundation we are laying the whirlwind which, our kids will inherit.
Murf,
You are wrong that the “first and primary question” should be “Will our policies enhance economic growth?” The question should be “Will our policies maximize valuable and sustainable output per unit of input and per unit of toxic output?”
They’re similar, but produce very different results. “Economic growth” considered in a vacuum can come with enormous external costs which also yield “a whirlwind out kids will inherit”. Some of these are the obvious list of “pollution”, “resource depletion”, and “debt”, but also include “sprawl”, “congestion”, “poverty”, and “social exploitation”.
Madame,
I disagree with some of your concern. I think we should celebrate not spending the $250 billion for financial institutions. As much as I am appalled at how many of the people who ran them into the ground have suffered no apparent personal consequences, I’m very happy that they seem to need no more support. There is still the retail real estate shoe to drop, but that will mostly hit regional banks which can probably be dealt with in the normal FDIC manner.
There is more talk on the hill of a VAT these days, apparently on both sides of the aisle. Many economists say that a VAT is “less distorting” than income taxes, and you seem to be in that camp. So I do believe that there will be some sort of effort made to match revenues to the long-term responsibilities of the government. If it comes, I hope that food will be exempted although it seems that it would be hard to draw boundaries around processes that are “food related”. Just as an example, where would the VAT stop on the cardboard used for cereal boxes?
And of course the Republicans don’t want a VAT to cover unfunded mandate shortfalls; they want it to replace the income tax, which would be ruinously regressive. But they can sell to China now, right? So who needs Americans?