Dollar bills 370.
(photo credit: Steve Marcus / Reuters)
Typically, even when there is good news – seriously good news, not just a minor
item or fleeting event – you wouldn’t know about it unless you made an effort to
find out. The simplest explanation for this phenomenon is to see it as part of
the information overload problem and the inability of the media to sort and
filter the flow of information and data, so that what is important is extricated
from what is secondary, or completely irrelevant.
There is, as usual,
tons of bad news around, most of it from Europe – such as the latest jump in
Spanish unemployment to 27 percent, a number that really does boggle the mind.
There is also good news here and there: the UK reported that its economy grew in
the first quarter of the year, and by more than most analysts had dared to
predict, after two successive quarters of contraction.
But these are just
regular monthly or quarterly economic data, part of the accepted picture. In
Spain the woe gets worse and in Britain it has eased slightly, at least
What about a development that imposes a change in the
overall picture? That would have to relate to a country bigger than Spain or
Britain – say, the US. And it would have to relate to something really important
in the American economy – say, the budget deficit.
Well, we all know that
the Americans are running huge budget deficits. We have heard, ad nauseam, about
the wretched, squabbling American politicians and their inability to get to
grips with the country’s fiscal crisis. We have learnt new concepts, such as the
debt ceiling, and new terms, such as sequestration. But nobody told us that the
deficit is actually shrinking. Not just in a specific month because of some
chance occurrence, but a steady downtrend that is now in its third year. And not
by the odd billion or two, but by hundreds of billions of dollars.
bad for all those people who keep complaining that this column is full of doom
and gloom. And too bad for all those people who are convinced, as a matter of
supreme dogma, that Obama and Co. are bent on destroying the United States. I
suspect there is a large overlap between those two groups, but anyway, here are
some boring facts.
The federal budget deficit keeps getting smaller. This
has nothing to do with the stupid sequestration, the effects of which will only
be felt going forward. Spending has been lower than expected throughout the
first half of this US fiscal year, which began on October 1 – as it was in FY
2012, which ended on September 30 last year.
Similarly, revenues have
risen, both in the current and previous fiscal years. The outlook is for more of
the same, this year and next. Goldman Sachs just reduced their estimate of the
deficit for FY 2012 – for the second time in three months. Last time, they cut
their deficit forecast from $900 billion to $850 billion and now they have cut
that to $775 billion. Expressed as a ratio to GDP, which is the way deficits
among different nations can be compared most easily, this means that the US
deficit for FY2013 is now expected to be 4.8%, down from the previous estimate
of 5.3% and the 5.6% expected last October. A more dramatic comparison is with
the monstrous deficits of 8-10% per annum that were recorded in
In other words, there has been a major improvement in one of
the most important economic indicators in the world’s largest economy. It has
been underway for some three years and looks set to run much further. Goldman
estimates that by FY2015, the deficit will be sub-3%. That, unfortunately, is as
good as it gets, even seen through Goldman’s rosy spectacles – after that the
deficit begins to rise again. Nor is this continued improvement baked in the
cake. There are numerous things that could go wrong, in the US or globally, and
send the improvement into reverse.
Even if nothing goes wrong, Goldman’s
analysts are quick to point to the potential threat hiding behind this good
news. If Congress finds out that things are rapidly getting better, there will
be no incentive at all for it to address the long-term issues underlying the
budget deficit, such as entitlement reform. This is not nit-picking: the
improvement that has taken place is almost entirely cyclical – meaning it is the
result of the swing out of the Great Recession into recovery, weak as that has
been. The underlying problems have not been touched, nor is there any political
desire to get to grips with them.
So it’s really all part of the
Orwellian world we now live in: good news – the budget deficit is shrinking – is
bad news, because it will deter the political system from making essential
reforms. Bad news, on the other hand, is good news, because it will make the
central bankers maintain the flood of liquidity, thereby keeping the financial
system on a “high” and avoiding any unpleasant encounters with