Everything You Heard About the Deficit Falling Is Wrong
If it’s too good to be true, it probably isn’t. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines that came of age decades ago.
So went the telling of the deficit story last week. Most of the media bought the notion that somehow the deficit had magically halved to $682 billion from around $1.1 trillion last year, based on not even examining the Treasury Department's own reports before promoting that gleeful and surreal conclusion.
When the Congressional Budget Office (CBO) announced that the deficit underwent some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The magic number proved that government fiscal stimulus will ultimately boost the economy. (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) Thus, budgetary cuts are not necessary.
Where there is truth to this (austerity never helped anyone but those not affected by it), ignoring the fact that certain federal fiscal stimulus plans were used as reasons to increase overall debt in the form of treasury securities that banks use as reserve to buoy the banking system—and thus the stock market—and not the general economy, does economics and more importantly, the country, a disservice.
On the other hand, the free-market types also considered this a triumph of their philosophy. By not overly regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal.
Again, this does their notion a disservice because a true free-marketer would be against the Federal Reserve propping up the treasury (and thus debt) market by buying lots of treasuries, and allowing banks to park more treasuries on their books to the tune of $1.5 trillion worth) and toxic assets (in the form of buying $85 billion of them from banks who had them rotting on their books allowing banks to free up space to speculate in other ways).
Those debates, in all their generalities, will continue on. Meanwhile, there’s the matter of what sparked the latest phase of debates over big vs. small (rather than Wall Street-coddling vs. population-stimulating). -the deficit figure, that number that measures what the government takes in vs. what it spends, and what it shows, is that neither bank stimulus nor populace stimulus has changed very much in the past three years.
First, a hat tip to Karl Denninger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go. According to Denninger, since September 28, 2012, “there has been a net $762.6 billion of new debt added to the federal balance sheet, not the $488 billion the Treasury Department claims.” In addition, Social Security and Medicare are almost $90 billion in the hole this year already.
He writes that Treasury’s own cash statement indicates that, “At the current run rate over the four calendar months … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, which is about the same. If you include figures through the end of April, that same run rate produced a deficit of about $1.307 trillion.
I was truly puzzled by the new figure and more so by how much of the media and various Krugmanites tend to lump all fiscal stimulus into a population helping category, without noting that certain forms help the banking system more than the population. To be sure, stimuli like extended unemployment programs help families make ends meet while seeking better opportunities, but programs like HAMP barely make a dent in peoples’ foreclosure-related problems, while enabling banks to benefit from more aggregate support.
What seemed odder is that the deficit has always been reported as the total of those debts/expenditures relative to revenues, and simple logic says that those debts/expenditures haven't dropped, and revenues haven't increased by what is reported near a $500 billion shift....
One is tempted (if one cared to probe for a nanosecond) to ask what the Treasury Department didn’t include, but its math doesn't work even if it didn't exclude anything. Take its own report, the Monthly Treasury Statement which compiles activity from the start of the current fiscal year (October 2012) through April 2013.
A very cursory look at this report clearly reveals some items that don’t actively support the report’s optimistic subtitle.
Take Table 1. The numbers show that there have been $1.603 trillion in budget receipts so far for fiscal year 2013 vs. $2.090 trillion in outlays. This indeed produces a value for a current deficit (outlays minus receipts) of -$487 billion.
The same table also shows there were $1.383 trillion in receipts for the same period in 2012 and $2.1 trillion (about the same as this year) in outlays. Combining those figures, we do get a comparative deficit this time last year of -$719 billion. Okay, so far, it's on point with the headline's cheer.
However, just below Table 1 comes some small print. The Treasury Department appears to have changed some accounting methods. The small print reads: "The deficit figure differs by $2.23 billion due mainly to revisions in the data following the release of the Final Monthly Treasury Statement." There’s no clarity about how those revisions changed numbers, and the changes are small in the scheme of things, so let’s raise an eyebrow and move on for now—to the good part.
Even if we pretend those changes don’t matter and even if the rest of this year's receipts come in 16 percent greater than they did last year (which on average is what this table is indicating so far), we'd still get a total of $1.603 trillion receipts plus an expected $1.234 trillion. That equals $2.614 trillion in total receipts for 2013. Remember that number for a moment.
Now, consider that even if the rest of this year's expenditures remain flat to last year's (like the first part of the year indicated), there would be $3.5 trillion in outlays for 2013. If we subtract that $3.5 trillion in outlays from $2.614 trillion in receipts, we get a total deficit of approximately $886 billion; certainly not the $642 billion the CBO recently announced.
But there’s more. There’s Table 2.
According to Table 2, those expenditures actually won't be flat, instead they will be higher, by about $184 billion, to reach $3.684 trillion.
Subtracting $3.684 trillion from $2.614 trillion, we get a total expected deficit of approximately $1.069 trillion—or about the same as it has been over the last couple of years—and again not the $642 billion that the media spread, and that Krugmanites consider reflective of fiscal stimulus working for the overall economy.
There’s a danger in working with numbers. They can be massaged and bent and faked and shrouded with suppositions. But, that’s not the case here. This is a case of simple addition and subtraction using Treasury’s own report. Doing so reveals a discrepancy between the recent headline deficit number and the one in the report. The issue here isn’t whether government stimulus works or not (nor how it was designed and who it really helps most beneath associated political rhetoric), but about why people can be so eager to be right about the nature of the forest, they ignore the fact that they are running smack into a tree right in front of them. Let’s at least agree about the tree, and move on from there.