Disappearing Deficit

During the 2004 presidential elections, Democrats tried to persuade the American public that job creation was the worst since the Great Depression and the country was in a downward economic spiral. In order to make the case, Democrats had to employ statistics creatively. We could no longer look at the unemployment rate, the traditional measure, because it was too good. Instead, they used other Bureau of Labor statistics that notoriously lag the economic growth that was beginning even in 2003 and 2004.

There was a downturn beginning in late 2000 and early 2001 as the country entered a mild recession. This was cyclical response to the growth at the end of the 1990s and the collapse of the “Dot.Com Bubble.” Then after the terrorist attacks of September 11, the downturn grew deeper as the national mood soured and the stock market plunged. The combination of a loose money supply provided by the Federal Reserve and President BushÂ’s tax cuts pulled us back to prosperity. Inflation stayed low, unemployment fell, the economy roared back and since 2003 stock market values have reached new highs. In 2004, the fullness of the recovery was not yet as obvious as it is now. Democrats can no longer complain that the overall economy was not doing well. Instead, they have to try to provoke class warfare with erroneous complaints that the benefits of economic growth have not been wide spread. These statistics on income and wealth inequality cited are just as misleading that those previously used by Democrats to disguise rebounding employment.

There is at least one other economic index whose rebound has been hidden. One of the largest complaints by the Democrats now was that tax cuts increased the federal deficit. Now the size of the deficits may be large, they are not large with respect to the economy. Indeed, as a fraction of the Gross National Product (GNP) they have already been decreasing. Unfortunately, relative measures, though more meaningful, are more difficult to explain. It seems now that federal receipts are growing so rapidly that the nominal deficit may soon disappear and the one remaining Democratic economic complaint will evaporate.

The value of the nominal federal deficit over last decade is shown below. This is a plot of the twelve-month running average in the federal deficit in billions of dollars. The month-to-month numbers are noisy. Note, that the plot shown is a “following” running average. The value for the current month is the total deficit for the last 12 months. This plot would tend to be a lagging indicator.

Federal Deficit - 12-month running average
The combination of loose monetary policies, spending restraint and growth accounted for the surplus in the latter half of the 1990s, President Clinton’s second term. The year 2001 would have seen a decrease in the surplus in any case, but after September 11, the plunge was precipitous. The budget deficit reached its largest value at the end of 2003. Since then the deficit has been steadily disappearing. Steve Conover of the Skeptical Optimist has been carefully tracking the federal deficit. In his plot below, he fits a trend to the budget surplus/deficit data since January 2005. By his extrapolation, the nominal federal deficit should disappear in the middle of 2008.
Skeptical Optimist Projection
The exact point of zero deficit depends on precisely how one does the fit. If one begins the fit in January 2004 when the deficit first began to decrease, the crossover point to zero nominal deficit occurs in 2009. The longer the fit period, the more statistically significant the linear fit and projection are. However, the shrinking of the deficit has been accelerating and since the twelve-month running average is a lagging indicator perhaps Conover’s projection is most accurate. Conover concedes noisiness in the extrapolation of current trends. This collapse of the federal deficit is amazing and a testament to the power of tax cuts. The deficit is decreasing despite an expensive war in Iraq, a period of little spending restrain, and the introduction of prescription drug plan for seniors, a new entitlement. It suggests that rapid growth is perhaps the only realistic way of balancing the federal budget, whether in real or nominal terms. You can tell that the economy is doing well when Democrats stop talking about it.The Democrats’ position has been out-of-phase with reality: complaining about unemployment just as employment accelerates or complaining about the deficit just as it is about to disappear. Are they equally as out-of-phase with respect to other issues?You can tell that Iraq is not going well, or is at least perceived as not going well, when the Democrats incessantly talk about it. Unfortunately, Democrats now have a vested political interest in failure in Iraq. It is not that they really want failure, but they are in the uncomfortable position of knowing that good news for Americans in Iraq is bad news for Democratic political ambitions. If the surge of forces in Iraq works, Democrats may find themselves conspicuously wrong again — just before an election. They will then have to rely on the traditional method of concealing and ignoring success.

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