Shrinking deficit, improving job growth — plenty of reasons for economic optimism

For a few years, one of my closest friends referred to me routinely as Mr. Doom & Gloom because of my consistent predictions of a worsening economy.

I never understood the baseless optimism before the recession and during the first full year of it in 2008. And I sure don’t understand why so many people keep using the word “crisis” to describe the current state of the federal budget. We have some long-term issues — really important ones — but the American economy is hardly facing any sort of crisis, unless it’s a politically manufactured one.

If the private sector continues to add jobs at the current pace through the end of the year, 2013 will be the best year for private sector employment growth since Bill Clinton was President.

And federal budget deficits, which ballooned because of collapsing revenue and increased spending (some discretionary, some mandatory) during the recession, are falling fast. And it looks like part of the decline is related to a surprisingly persistent slowing of the rate of increase in health care spending.

From the latest projections by the Congressional Budget Office:

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, the Congressional Budget Office (CBO)
estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

Because revenues, under current law, are projected to rise more rapidly than spending in the next two years, deficits in CBO’s baseline projections continue to shrink, falling to 2.1 percent of GDP by 2015 (see Table 1 on page 8).

But wait? Why should we be happy with any deficit at all? Isn’t all this unsustainable? We could and should shoot for budgets that balance, but the U.S. has been running yearly deficits for a few generations now, excepting only a handful of years. Such long-run deficits would seem to be the very definition of “sustainable.” As long as interest payments on the debt remain near historical norms, there’s no indication that our economy will suffer some new plague.

But shouldn’t the federal government spend only what comes in, just like American households do? Ha. How many households out there are literally carrying no debt? How many Americans pay cash for their homes, cars, and every other big ticket items?

Take a look at this graph from Calculated Risk regarding deficits as a percentage of GDP. Note that this year’s deficit, as the nation is still in the long recovery process from the housing bust and financial crisis, will be less than it was for several years under Reagan and the first Bush. By the time Obama leaves office, our deficit/GDP ratio will be lower than it was through much of the Bush II presidency.


There are a number of reasons for the brighter forecast (which I suspect will be revised even more favorably at a later date): an improving economy, the tax increase on the highest earners, faster-than-expected repayment of bailout funds, the expiration of the payroll tax cuts, and sequestration and other substantive cuts in federal spending already enacted.

I don’t agree with all the recent cuts, and I think the best argument out there right now is that we’re cutting the deficit too fast.

Sure, we have longer term issues regarding the deficit and the debt, both of which are likely to increase again in a few years as Social Security and Medicare eat up a bigger and bigger chunk of the federal budget as the population ages.

I’d love to see some sort of “grand bargain” that deals to some degree with these longer term issues, and I think the cuts of sequestration are doing and will do considerable damage to certain sectors and in some locations.

But there are lots more reasons to be optimistic than pessimistic about the U.S. economy over the next few years.