The deficit is going down. Woo-hoo! Let the celebrations begin.
Oh, wait. That may not be altogether a good thing. Certainly not for Republicans. They need an out-of-control deficit to bludgeon Democrats into cutting more spending. It may not be good news for the economic recovery either. Budget austerity means slower growth. Want proof? Look at Europe.
The Congressional Budget Office estimates that this year's federal budget deficit will drop from $1.1 trillion to $845 billion. Economists at Goldman Sachs project that we will get the deficit under control within two years. Why is this happening?
For one thing, we cut government spending. Not in a very thoughtful way, to be sure. We did it with a meat axe, known as the sequester. We also raised taxes, and not just on the rich. Everybody's payroll taxes went up this year.
Now that the wars in Iraq and Afghanistan are winding down, defense spending has been declining. And there's good news on Medicare and Medicaid: nobody is entirely sure why, but health care costs have not been rising as rapidly as expected. Tax revenues increased this year because of the economic recovery, weak though it may be. Plus, the recovery in the housing market has earned big profits for mortgage giants Fannie Mae and Freddie Mac. They are repaying tens of billions of dollars in bailout money to the federal government.
One consequence: we won't hit the debt ceiling as soon. It looks like the deadline won't come until October. October could be a double whammy. That's the beginning of a new fiscal year, and if Congress can't pass a budget, we could have a government shutdown. Oh, joy.
Actually, it is joy for Republicans. Fiscal crises give them political leverage. They can force Democrats to make concessions: if you don't slash government spending, we'll force the government to default on its debts. That's an unthinkable prospect for Washington and Wall Street. Would Republicans actually do that?
Yes. They've got public opinion on their side. Raising the debt ceiling is never politically popular. To most Americans, it means we've overspent on our credit card so we're going to raise our credit limit. Doesn't sound like such a good idea.
Just to protect themselves, House Republicans have passed a bill saying that, if the U.S. goes into default, the first people who get paid will be our creditors. That's supposed to reassure bondholders that, even if the U.S. goes into default, "we're going to meet our obligations," as House Speaker John Boehner (R-Oh.) put it. Democrats, who are certain to kill the bill in the Senate, call the Republican proposal "Pay China First."
A shrinking deficit will help avert another fiscal crisis. Why is that a problem?
Because the only way Washington works these days is if it is facing a crisis. Sen. Bob Corker (R-Tenn.) complained to the Washington Post that the Senate is facing "fiscal fatigue" -- "There isn't any sense of urgency right now." Not like there was in August 2011, the last time a debt crisis loomed. Democrats and Republicans made an 11th hour deal, which gave rise to two more crises -- the fiscal cliff and the sequester. "Sometimes we don't want to act until a gun is at our heads," Sen. Jeff Sessions (R-Ala.) told the Post.
Sen. Patty Murray (D-Wash.) called it "management by crisis." If there is no crisis, there will be no management. Gridlock will rule. That's because of our Constitution, which sets up a complicated system of checks and balances that makes it difficult for the government to get anything done unless there is an overwhelming sense of public urgency, i.e., a crisis.
What we're seeing now is the routinization of crisis. Fiscal crises have become routine because they're the only way we can break the gridlock in Washington.
Now that the deficit's going down, Republicans have to come up with a different crisis. They have: tax reform. Republicans are insisting that any increase in the debt ceiling be "paid for" by simplifying the tax code. President Obama has no problem with tax reform. The battle will come when Congress starts ending tax deductions and has to decide what to do with the new revenue. Obama wants it to be used for deficit reduction. Republicans will insist that the revenue by used to pay for new tax cuts. More gridlock!
Shrinking the deficit is also causing another problem. It's holding down economic growth. That's why higher taxes and lower government spending are called "austerity." Economists estimate that the current austerity regime is driving up unemployment by a full percentage point and driving down the nation's economic growth rate nearly two points.
Are voters going to treat President Obama as a hero for reducing the deficit? Not likely. What Obama needs is a second-term economic boom. That's what enabled both Ronald Reagan and Bill Clinton to go out in a blaze of glory. And to get their vice presidents elected after them. (Well, Al Gore did get 540,000 more votes than George W. Bush in the 2000 election.) In Reagan's second term, the nation's economic growth rate jumped to 4.4 percent. In Clinton's second term, it was 4.5 percent. So far, in Obama's second term, economic growth has averaged a pallid 2 percent.
In his State of the Union speech way back in 1985, President Reagan said, "The best way to reduce deficits is through economic growth."
That was true then and it's still true, nearly 30 years later.