The (non)Mysterious Vanishing Deficit

If I were to assume the persona of Sherlock Holmes, in explaining what has happened to the vanishing deficit, I would be inclined to make the following observation; “As a rule, the more bizarre a thing is the less mysterious it proves to be”. sucka

Voters with long memories–by U.S. standards anyway–might recall that from 2010-2013 politicians and the media exuded anxiety over the [perceived] unmanageable level of the deficit and a [perceived] disastrously high public debt. Prominent among the deficit/debt Chicken Littles were Republican Congressman Paul Ryan(the GOP’s “Budget Guru”) and neo-Ayn-Randian Senator Rand Paul.

The president himself felt sufficiently moved by the conservative squawking to plunge whole-heartedly into the daunting task of cleaning up the budget mess, (which, as we all know–he caused—just ask Fox News). All of this desperate scrambling to reduce the expanding deficit and debt sought to postpone the dreaded, but much ballyhooed day when “financial markets” would wreak their havoc on the spend-thrift Obama government with catastrophic consequences not seen since Luke blew up a Death Star.

I revisit this irrational angst over deficits and debts because, surprising as it may seem, the deficit is “mysteriously” going away. In late 2009 the overall fiscal balance of the federal government rose to the annual equivalent of almost $1.5 trillion, nudging minus 11% of national product (GDP).

Three years later –to the obvious chagrin of Republicans hoping to proclaim yet again how our grandchildren will be saddled with needless give-aways to the less fortunate–the deficit fell to $1T (end of 2012). At the end of last month it barely exceeded 500 billion (just 3% of GDP, down from close to 10% when GWB finished his Presidential hat trick of 9/11,  Wack-A-Fictitious-WMD so Cheney’s buddies at Halliburton could buy a few more mansions, and last but not least, the worst stock crash since the Great Depression). It seems on track to drop to 400 billion by the end of this year and most likely end up a surplus by the end of President Obama’s term (see Bloomberg News).

So what happened to mysteriously pull the deficit back from the “fiscal cliff”? Republicans will surely claim it due to their effort to bring Europeans-style, disastrous fiscal austerity to the fore. So, did painful but courageous cuts in “entitlements” and other expenditures prevent the US government from cliff-diving off the edge? The answer is NO, HELL NO. Expenditure cuts did not reduce the deficit. As a matter of fact, federal expenditure in 2014 is essentially the same as it was at the end of 2009, and the deficit is $1 trillion lower!

For those challenged by macroeconomics, or mathematics in general, there is a simple explanation. The federal deficit is down by one trillion because revenue is up by one trillion. Moreover, this revenue increase did not occur because tax rates were raised. In 2007 just before the crisis hit the fan (so to speak) federal revenues were 17.9% of GDP, and the Congressional Budget Office projects the share for this year at 17.6%.

The deficit is down because GDP is higher. Pretty simple stuff. By definition increases in GDP (national income) occur because household and business incomes rise. With no change in tax rate, federal revenue increases when these incomes rise. The deficit declined because the economy expanded, not because “entitlements” or any other expenditure was cut.

Unless the president does something extremely foolish such as wasting a trillion dollars on another war (and “wasting” seems the appropriate word), I can confidently predict that the federal deficit will change to a surplus by the end of his term.

Continuing to set the record straight, the failure to increase federal spending has actually prolonged the recession and stagnation of the US economy. Yes, you read that correctly – failure to increase government spending, which is a proven, successful method of stimulating stumbling economies. Since revenue rises with growth, we could have the present deficit, 3% of GDP, with a much higher level of household income and lower unemployment but for federal expenditures flat-lining during 2009-2014. More expenditure, more growth; not to mention bringing all those roads and bridges that your loved ones cross every day up to code.

Even Daddy Bush correctly called the ridiculous notion of Reaganomics (so-called supply-side economics,which doesn’t exist except in the vast emptiness of conservative minds) “voodoo economics”, which alleged that cutting tax rates would not reduce tax revenue. Junior Bush managed definitively to refute this right wing flight of fantasy(read: bullshit) when he cut taxes for the rich and revenue fell. In order to reduce deficits absolutely without changing tax rates, an increase in public expenditure must provoke an increase in private investment.

However, this is an indirect effect(read: hard for cousin Earl to understand). Public spending increases employment and household incomes. The subsequent increase in household demand can stimulate more discretionary spending from higher and better employment, thus nudging idle production capacity back into life, that became dormant from recessionary declines in demand.

Reactionaries dismiss this expenditure-growth-tax linkage by saying it is nothing but “Keynesian economics”. EXACTLTY!! That is exactly what it is. The only proven effective, flexible macroeconomic model known to man. I have to wonder if, when they are told that water runs downhill, do these same nay-sayers shrug and say ” that’s just Newtonian gobbledygook about some damn unseen force called “gravity” pfffft”.

As a result of the lies by reactionaries about approaching deficit disaster, and the equally reactionary failure of the Obama government to adequately challenge those lies, the recovery of the US economy has been slow and halting. GDP actually fell in the first quarter of this year (then recovered in the second).

Six years after the recession began, inflation adjusted private weekly earnings have risen by only 4%, and total unemployment is still over a percentage point higher than in 2007. Not since the depression of the 1930s has unemployment declined so slowly.

The power of the fake-economic (“fake-o-nomics?”) ideology that serves the 1% so well is impressive. With generalities, scare tactics, and outright lies, they manage to supplant simple, easily available statistics unfiltered by any slight-of-hand with faux-technical manipulation and fear borne of ignorance of macroeconomics. The fiscal deficit of the United States resulted from the contraction of national income at the end of the 2000s.

Reckless speculation due to foolish deregulation of financial corporations caused the contraction when the house of cards built in the mortgage market collapsed.

And yes, Bush, Hank Paulson (Treasury), Joe Cassano (AIG) and Kathleen Corbet (Standard & Poor’s) were as asleep at the switch in their respective positions as Michael Brown (“you’re doin’ a heckuva job, Brownie) was at FEMA during Bush’s lesser-remembered screw-up–Katrina; the worst hurricane disaster in U.S. history.

Yet we are told that savage cuts in social expenditures (i.e., Medicare, Medicaid, Social Security) are the only means necessary to offset those same corporations from speculating on public bonds.

There is a word for this type of shameless audacity in Yiddish, and it’s “chutzpah“.

The most common means of defining “chutzpah” is to re-tell the story of a boy who murders his mother and father, then pleads to the court for leniency because he is an orphan. But now, we have an even better example. The financial crooks that caused the collapse of the economy and explosion of the deficit warn us against speculation against the public debt unless we cut the few public sector funded social benefits that we have left.

Now, that’s some chutzpah.

Harvey A. Gold