Monday, January 13, 2014

Bye Bye, Budget Deficit

The Treasury puts together monthly budget deficit data. The latest figure came today: a surplus of $53 billion. Check out the rolling 12-month deficit, above, which eliminates seasonality and most of the noise. But be aware that the "fiscal cliff" budget deal forced a lot of fiscal contraction forward. (One example: People who paid capital gains taxes early to avoid higher rates and tax uncertainty.)

We've cut the budget deficit by half since last year. It is shrinking nearly as fast as it grew as crisis broke out in 2008. Just think about that.

It's pretty easy to see how you might have expected a second recession with that amount of contraction. Which raises a question. Someone explain to me how the level of fiscal contraction we're seeing is at all consistent with the view that fiscal policy matters a lot at the zero lower bound. The last year of data would suggest that the fiscal multiplier can't be very large at all, right?

I bring this up because what I think market monetarists are looking for is a story from the fiscalists about how the U.S. has gotten away with this without Great Recession 2.0. Every version of the story seems to require relatively potent monetary policy and relatively impotent fiscal policy. This is a bit of a response to Brad DeLong's excellent post, I suppose.

Note: The vertical axis label is in error. It should read "millions," not "billions," of dollars. Sorry about that.


  1. If you think fiscal policy doesn't matter you should withdraw your savings, shred them and see if you can maintain your lifestyle with the new balance sheet. Govt surpluses weaken our balance sheets, accounting 101. What you see here is the result of automatic stabilizers, if they are too strong they will choke the recovery. Whether they are too strong cannot be told from the deficit alone.

  2. Peter, that is extraordinarily incoherent. The deficit still remains at historically high levels, and our total debt is growing. Were it not for historically low interest rates, this deficit would be running at twice its current rate.

    As for how government surpluses destroy balance sheets, I would be interested to hear that theory. Unless you are a Speculator, counting on low interest rates to fuel the latest asset bubble, your claim makes no sense.