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Budget Deficit Already Falling

You wouldn’t know it with all this talk about out-of-control spending and a massive debt being passed to children and grandchildren, but the budget deficit is actually shrinking. And, you definitely wouldn’t know this, but that’s bad news for the economy.

The U.S. budget deficit for the first nine months of fiscal 2011 was $970.52 billion, a figure that is smaller than the $1.29 trillion deficit for the same period in the prior fiscal year.

The U.S. Treasury Department, in a monthly budget statement released Wednesday, said the budget deficit for June 2011 came in at $43.08 billion, less than June 2010, which was $68.42 billion.

We did have three months of half-decent job growth in this period, so that may account for some of the revenues. But as we head into the rest of the year, a smaller budget deficit is a function of fiscal policy contracting. All of the cuts in 2011 appropriations and the fading out of the stimulus package leads to less spending and a smaller budget deficit, but also less spending to counteract cutbacks in state and local government, and less spending that finds its way into job creation. At the present time, the country needs a larger budget deficit, not a smaller one. The economy is too weak to generate enough demand to create jobs, and only government has the ability to provide that demand at this point. Businesses aren’t investing, exports aren’t outstripping imports, and consumers aren’t spending.

Over the medium-term, this trend is indicative of what will happen if nothing is done from a budget standpoint. If the Bush tax cuts expire, if statutory PAYGO is followed, the budget will come into primary balance. That’s just a fact. What’s more, the staggered expiration of the Bush tax cuts provides time for more stimulus.

The President knows this but he’s more concerned with his re-election campaign and an economic theory that posits that we need major budget cuts now to reduce the deficit.

The prevailing theory has been that the Obama administration would seek the largest tax increases it could plausibly pass. Liberals are now dismayed to learn that that notion is false. Instead, the Obama administration wants to take the tax issue off the table as soon as possible; the president is willing to take much less in revenue in exchange for spending less time arguing about taxes.

There have been signs of this disposition all along. In the 2008 campaign, Obama swore never to raise taxes on families making less than $250,000 (a pledge that he has technically broken several times — the excise tax on high-value health insurance plans is one instance — while continuing to repeat it). Then there was the December 2010 tax deal, when the White House extended all the Bush tax cuts in return for additional fiscal stimulus. The economy was weak, White House aides said, so stimulus was more important than revenue. Besides, they argued, it was only a two-year extension. In 2012, the economy would be stronger, and they’d be in a better position to let some of the cuts expire.

But the debt deal that the president just offered the Republicans showed that’s not a fight he wants. That deal would have preempted the expiration of the Bush tax cuts next year, eliminating the White House’s leverage on that issue while raising less than half the revenue that the Simpson-Bowles report recommended — and about one-fifth as much as letting the tax cuts expire in full.

This is not someone on a tax jihad, or even someone interested in returning taxes to a nominal level approaching the Clinton years. That’s a recipe for deficits far into the future no matter what you do on spending – and the only way to change that is to bring spending down to cruel and catastrophic levels. That does Grover Norquist’s work for him. The most charitable explanation is that this will clear the decks and give room for stimulative measures for the economy, but I don’t even understand the logic of that theory, nor do I think that deficit spending after deficit reduction will provide any benefit on net.

Obama thinks deficit reduction represents sound policy that will help the economy. He thinks taxes in the Clinton era were too high. Beyond all the theatrics, he’s telling you what he believes.

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David Dayen

David Dayen

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