If you’re thinking to yourself, “That’s the dumbest headline I’ll read all day,” hang with me here, all will be explained. First of all, the Federal budget’s deficit is shrinking very, very quickly. Faster than any time since WW2. This is due to many factors but boils down to two things: revenues have gone up and spending is down. For a more detailed look on the reasons click here and here.
On the surface, this all sounds like good news. How could shrinking deficits be a bad thing? David Wessel at The Wall Street Journal explains:
In the depths of the most recent recession, the fiscal year that ended Sept. 30, 2009, the deficit was 10.1% of gross domestic product, the value of all the goods and services produced. Since then, the deficit has declined to 9% of GDP in 2010, 8.7% in 2011 and 7.0% in fiscal 2012. Private analysts predict the deficit will be between 5.5% and 6.0% of GDP in fiscal 2013, depending on the outcome of the budget talks…
…But consider the U.S. economy at the end of 2012. The U.S. Treasury, for now, is borrowing hundreds of billions of dollars at rock-bottom interest rates. There is no pressure from markets for immediate deficit reduction. The U.S. economy has been and is expected to grow at a painfully slow pace. Four months ago, forecasters surveyed by The Wall Street Journal expected the economy would expand by 2.5% over the four quarters of 2013. This week, they are predicting 2.3%—and they expect unemployment to be above 7% until mid-2014, as are Federal Reserve officials in their latest forecast. That is why the White House is looking for ways to slip a little infrastructure spending into any deficit deal or otherwise give the economy a short-term boost.
Federal budget deficits do threaten American prosperity—tomorrow. Waiting until tomorrow to enact laws to change benefits so their costs rise more slowly and to alter the tax code so it brings in more revenue would be imprudent. But an overdose of instant austerity would be, too.
Too much austerity, too quickly, can shock the economy. Picture it this way: imagine your stereotypical military town; its just outside of a major post like Ft Stewart, Georgia or Ft Polk Louisiana. If all of a sudden the DOD decides they no longer need that post, the local economies would be decimated. They rely on government spending. The overall economy is like that, just to a far lesser extent. Reducing spending can and will shock the economy. It is simply it better to shock a healthy economy than a weakened one, and that is what the WSJ is arguing for.
Our budget problems are future problems. I don’t blame fiscal conservatives for their desire to correct it, I just wish their timing was better.