2012 Deficit Was Smallest In Last Four Years. Is That Good Or Bad?

Originally posted at Capital Gains and Games. [1]

I deliberately wrote the headline above to make some CG&G readers (and you know who you are) angry.

Here's the news: The U.S. Treasury reported last Friday [2] that the deficit for fiscal 2012 was $1.09 trillion. This was $200 billion or so less than the $1.3 trillion deficit recorded in 2011 and more than $300 billion less than the $1.42 trillion deficit in 2009.

Yes, I could have easily said that the federal deficit exceeded $1 trillion for the fourth consecutive year because that would have been true.

And, yes, I could also have said that the $200 billion deficit reduction from 2011 to 2012 was the largest in U.S. history because that also would have been true.

Finally, I could have also written that the reduced deficit from 2011 to 2012 was the wrong fiscal policy given the fragile state of the economy and because the other primary drivers of GDP -- corporate spending, consumer spending, trade, and state and local government spending -- are all still well below what we need them to be to create growth.

So was the $1.09 trillion deficit in fiscal 2012 a good or bad thing?

Politically, of course, it's a nonstarter. A 15 percent reduction from one year to the next in the deficit used to be something a president bragged about. But these days the positive optics of the reduction are less important than the negative optics of the $1 trillion threshold, and almost everyone for whom the deficit is an issue won't be impressed because the red ink still seems so large.

As a result, no one in the Obama administration wanted to talk about the deficit any more than it had to and last Friday's late afternoon release -- the traditional
graveyard for news stories you want to bury-- was hardly surprising.

This situation isn't likely to change anytime soon because the existing split between the current politics and economics of the deficit will continue for at least the next decade. Even when the deficit gets to a point where economists say it shouldn't be an issue, it will still be a political problem that will generate significant controversy.

That means that the federal deficit for future fiscal years will likely continue to be released on Friday afternoons even if the final numbers show that it fell to $100 billion while GDP was growing by 5 percent and the debt as a percent of GDP was falling precipitously.

Here's a good story from Annie Lowrey of The New York Times [3] with more details on the final 2012 numbers.