Is the Deficit Even a Problem Anymore?
There's a theory in behavioral psychology called "recency bias." It says that people's assumption of the future is closely shaped by the recent past. Recent events are easy to recall, especially if they're traumatic or extreme. So we end up using yesterday as a baseline for what we think will happen tomorrow, systematically ignoring change.
I'm starting to think we're suffering from recency bias when it comes to the federal budget deficit.
This story starts in 2009, when a combination of stimulus and the worst recession in 80 years pushed the government to an unprecedented deficit of $1.4 trillion. This was totally unsustainable, and it rightly caused people (including me) to worry about government deficits like never before.
But four years later, we've made a lot of progress in stabilizing the deficit, which doesn't seem to be fully appreciated by those who continue to fret. We had a $1.4 trillion deficit in 2009, but it has since come down by nearly a third:
Source: Office of Budget and Management. *CBO's most recent estimate based on current law.
Two things have happened here. One is that the economy has gotten stronger. There are 4.7 million more people working today than there were in 2010, which increases tax revenue. And total federal spending has increased just marginally (less than 1%) since 2009 as stimulus spending tapers off. Put those two together, and you get a smaller deficit.
But the bigger change comes from two rounds of deficit-reduction bills Congress and the president hammered out over the last 18 months. The first was in 2011, when the Budget Control Act mandated a spending sequestration that begins this year. The second was the more recent fiscal-cliff negotiations, which raised tax rates on those earning more than $400,000 a year.
In both cases, most of the press coverage focused on the political flamethrowing and partisan aspects of the deals. But both really did make a difference in bringing the deficit under control -- particularly when combined with a strengthening economy.
Consider this chart, from the Center on Budget and Policy Priorities:
The blue line is what we faced in 2009 and 2010 -- reckless and unsustainable.
But after two rounds of deficit-reducing bills, today we're on the orange line. And it really isn't that bad. Debt as a share of GDP is set to stabilize next year and decline until 2018. A decade from now, it's set to be about where it is today. The red line, projecting today's path plus an extra $140 billion a year in savings, completely stabilizes the debt for the next decade.
No, stabilizing the debt doesn't mean running a surplus, or even a balanced budget. It stabilizes debt as a percentage of GDP, meaning debt is growing slower than the economy -- the key to long-term stability. (More on that here).
Budget forecasts have an abysmal track record, and the biggest asterisk on this chart should be that it doesn't include the possibility of another recession in the next decade -- which, you know, might happen. (Although it also doesn't include the possibility of another 1990s-style boom).
But the deficit path guided by current law -- the so-called "structural deficit" -- is on substantially better footing than it was two years ago, and there's a decent chance that it's already sustainable.
So is the deficit a problem anymore? Yes, because the biggest budget issues were never about what happens this year or next year or the year after that, but rather 15, 20, and 30 years from now as the population ages and entitlement spending grows exponentially. Those are still issues we haven't addressed. And the longer they're put off, the larger they grow.
But if you're still panicked about the deficit, remember recency bias. It's not 2009. It's 2013, and things have changed dramatically.
The article Is the Deficit Even a Problem Anymore? originally appeared on Fool.com.
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