The Disappearing Deficit

Every month, I use data from the Monthly Treasury Statement to update the chart below.  Every month, I read headlines that say things like “Bush Priorities Will Swell Deficit .”  And every month, I wonder, "Who’s off their rocker: (1) me, as I ponder what the chart is saying; or, (2) the people writing those incessant grim-reaper headlines?" 

Sometimes I even get the strange feeling that those folks are actually hoping for doomsday-confirming bad news: slower growth, shrinking tax receipts, lower incomes, higher unemployment, shrinking trade, etc.; I certainly hope I’m wrong about that.  In any case, all I’m doing each month is updating the actual results, and projecting straight line trends off of those results.  (It’s not that difficult; if I remember correctly, the necessary math is taught in high school.)  Each month, I update two trend lines: one is for Federal Outlays, and the other is for Federal Tax Receipts.  The “deficit” is equal to the difference between those two numbers. 

Predicting outlays is usually safer than predicting tax receipts, because spending keeps growing at about the same annual rate; although the White House says we are about to experience a blip due to Katrina repairs, it should be just that: a one-time blip on the trend line.  Tax receipts, on the other hand, grow when the economy grows, but shrink when the economy runs into trouble.  Therefore, a tax-receipts trend line yields a riskier prediction than a spending trend line does. 

The chart shows that the deficit has been shrinking for the last two years.  If (...and it’s a big “if”...) the economy continues to grow at the same robust pace, the deficit will disappear within 3-5 years, depending on how big the Katrina spending effect turns out to be. 

Click to enlarge.

If we can manage not to screw anything up (i.e., if Capitol Hill goes into gridlock), the green star is a non-trivial possiblility within three years, and (dare I say) likely within five.  Is it a pipe dream to hope for gridlock on Capitol Hill for a few years?  No tax rate hikes?  No unpopular spending program cuts that perversely create a backlash of support for tax rate hikes instead of unpopular spending cuts?  Sure, maybe hoping for three years of gridlock is just a pipe dream—but it’s fun for me to contemplate.  I'm an optimist; I am hopeful that gridlock can be achieved and sustained. 

Anyway, here's the bottom line:  I have not seen enough data—yet—to feel comfortable making an actual prediction that we will reach green-star status as of mid-2008; the Katrina spending blip could push it out another year or even two.  But wouldn’t it be nice to see the deficit issue yanked out from underneath the gloom merchants, just in time for the presidential campaign?