Thomas Sargent and Cutting the deficit

Have We Halved the Deficit?

Jan 30, 2014 • 275 Views

In the State-of-the-Union, President Obama said, “Our deficits–cut by more than half.”

Federal deficits 1973 to 2023 percent GDP CBO

Looking at the federal deficit as a percent of GDP, we can say that the deficit is much lower than 4 years ago.

BUT…

The deficit was an unusually large proportion of the GDP during the Great Recession (Dec. 2007-June 2009). It included more than $800 billion for stimulus spending and assorted bailout packages. With little effort because the special spending ended, we appear to have just returned to normal.

AND…

Deficits will probably increase again because of rising interest rates and the baby boomers. Higher interest rates mean the government has to pay more to borrow. Meanwhile, the baby boomer generation will collect historic highs from Social Security and Medicare.

AS A RESULT…

This is what the CBO projects:

Federal deficit and the Debt 2000 to 2038 CBO

I wonder whether saying we have halved the deficit returns us to fractal mathematician Benoit Mandelbrot. Yes, we can look at the coast of Great Britain from afar and see a lovely uninterrupted curving line. But move in to a closer view and the hazardous jagged zigs and zags start to appear.

Sources and Resources: Discussing “Pinocchios” from the President’s State-of-the-Union address, the Washington Post cited the deficit halving quote. For the facts behind the quote and the source of my graphs, I recommend the new CBO report (above graphs) on the deficit. Finally, I do suggest looking at “Mixing Vice and Virtue: Combining the Immediacy Effect and the Diversification Heuristic.” Much better than its title, the paper’s video examples provide insight about our Netflix queues, the subprime mortgage crisis and our ballooning federal debt.

 

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