Incredible Shrinking Deficit, II

N.Y. Sun ^ | August 24, 2007 | N.Y. Sun Editorial

[Lovebloggers]

2004: $413 billion 2005: $318 billion 2006: $248 billion 2007: $158 billion

Close readers of this column may recall the top three numbers in the list above from our editorial of July 12, "Incredible Shrinking Deficit." It commented on the mid-session review released by President Bush's Office of Management and Budget, which projected the fourth number, the 2007 federal budget deficit, at $205 billion. Yesterday, the Congressional Budget Office released its own updated estimate for 2007, $158 billion, a deficit even smaller than the White House's July figure. The CBO yesterday also released its latest estimate of the 2007 deficit as a percentage of the Gross Domestic Product, allowing us to update another list of deficit numbers:

2004: 3.6% 2005: 2.6% 2006: 1.9% 2007: 1.2%

The CBO's estimate of the 2007 deficit at 1.2% of GDP is significantly lower than the White House's July estimate of 1.5% of GDP, which we used back in the July 12 editorial, and well below the 40-year average of 2.4%. In other words, the case is stronger than ever that President Bush's tax cuts, rather than creating a budget deficit, are fueling economic growth that is swelling federal revenues and shrinking the deficit.

[SuperSonic]

Snip....

Democrats responded to yesterday's good news on the budget by predicting that the red ink would start flooding again in future years as the bills for entitlement programs such as Medicare and Social Security come due.

snip....

The last time a Democratic president cut the deficit, he did it by raising taxes, not cutting them.

[Stallone]

Bush was *this close* to running a surplus, despite two on-going wars.

What pushed the budget over the top?

Domestic, dumbass spending on useless programs NOBODY wanted.

And this will teach a whole new generation of Americans that Conservatives are poor fiscal managers. And that Clinton was a superior budget controller.

Way to go!

[petercooper]

Free drugs for Granny was a biggie

[ghostrider]

Incredible Shrinking Deficit

I am a bit fuzzy on the relationship, does this shrinking deficit also mean the trade deficit is shrinking? If not, does it matter for the long term US economy?

[remember]

I am a bit fuzzy on the relationship, does this shrinking deficit also mean the trade deficit is shrinking? If not, does it matter for the long term US economy?

No, there is no such direct link between the budget deficit and the trade deficit. The following graph shows exports, imports, and trade deficits (exports minus imports) since 1930:

The actual numbers and sources are at http://home.att.net/~rdavis2/tradeall.html. As can be seen, the trade deficit has increased fairly steadily since 1991, even during the budget surpluses from 1998 to 2001. The only relationship that I recall hearing about is that the budget deficit provides additional government debt in which foreign countries can invest the excess dollars that they receive via the trade deficit. In fact the trade deficit may help keep interest rates low by creating more dollars competing for that government debt. Of course, there is no free lunch. That "benefit" comes at a cost.

[remember]

2004: 3.6% 2005: 2.6% 2006: 1.9% 2007: 1.2%

The CBO's estimate of the 2007 deficit at 1.2% of GDP is significantly lower than the White House's July estimate of 1.5% of GDP, which we used back in the July 12 editorial, and well below the 40-year average of 2.4%. In other words, the case is stronger than ever that President Bush's tax cuts, rather than creating a budget deficit, are fueling economic growth that is swelling federal revenues and shrinking the deficit.

On the contrary, the CBO report estimates that President Bush's tax cuts will increase the deficit. The following graph shows a number of projections from the CBO report:

The actual numbers are at http://home.att.net/~rdavis2/cbobud07.html. As can be seen, the on-budget deficit, which excludes the surplus borrowed from the Social Security trust fund, is projected to be $339 billion, over twice as large as the reported deficit of $158 billion. If all trust fund surpluses are excluded, the deficit is projected to be $448 billion, nearly three times as large.

In any event, the reported deficit is projected to increase through 2010 and then decrease rapidly, becoming a surplus in 2012. However, that assumes that all of Bush's tax cuts expire as they are scheduled to under current law. If those tax cuts are extended as Bush proposes, the reported deficit is projected to continue growing, reaching a half-trillion dollars per year by 2017. Excluding all trust fund surpluses, it will reach $894 billion per year by 2017. More importantly, the gross federal debt is projected to rise to nearly $20 trillion, increasing from the current 64.7% of GDP to 91.5% of GDP. Hence, a more accurate name for our current budget outlook is the "Incredible Increasing Debt."

[ghostrider]

All this economic “talk” leaves me in a state of confusion, because there are far too many variables, exceptions and time lags to sort out the long run effects. On the bottom line I retreat back one simple premise, “No matter how good the prize appears to be, over the long run, you can’t get something for nothing.” Trading intangible dollar credits for tangible goods has the scent of the classical “chain letter.” Our economy seems to be one big chain letter backed by many other chain letters. Those holding the infinite number of intangible credits depend upon an infinite exponential growth of chain letters, which is a statistical impossibility.

[remember]

Correction: There was an incorrect statement in my prior post. The gross federal debt is projected to rise to $16.7 trillion (not nearly $20 trillion), increasing from the current 64.7% of GDP to 77.4% (not 91.5%) of GDP. Still, 77.4% of GDP will put the gross federal debt at its highest level since 1951.

[remember]

All this economic “talk” leaves me in a state of confusion, because there are far too many variables, exceptions and time lags to sort out the long run effects. On the bottom line I retreat back one simple premise, “No matter how good the prize appears to be, over the long run, you can’t get something for nothing.” Trading intangible dollar credits for tangible goods has the scent of the classical “chain letter.” Our economy seems to be one big chain letter backed by many other chain letters. Those holding the infinite number of intangible credits depend upon an infinite exponential growth of chain letters, which is a statistical impossibility.

The premise that there is no free lunch has likewise helped me to see through similar "chain letters". There are policies where the benefit is certainly worth the cost. But policies where there is absolutely no cost are extremely rare, if they exist at all. One free lunch that comes to mind is the myth that income tax cuts completely pay for themselves.

In any case, I agree that the trade deficit has a real cost. The only question is whether or not we can afford that cost. If we were simply spending a portion of the wealth that we were creating, that would be fine. But I suspect that we are, in effect, spending down past wealth that we inherited from prior generations. Time will tell.