Thursday, February 14, 2013

Is The Deficit Shrinking Too Quickly?

This post from Investors Business Daily seems both counter-intuitive and troubling:
Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession
To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn't. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession.

Far steeper deficit cuts during the demobilization from World War II and in 1937-38 both precipitated economic reversals.
No wonder economics is called the dismal science.

1 comment:

caheidelberger said...

Do they break down how much of the deficit decrease comes from less spending and how much comes from the economy springing back? I'd think that it would be hard to see a recession come from a deficit reduction that results from economic growth. (Ouch, head hurting, must do French verb conjugations!)