Smaller Deficits Are Bad News

A new report from the Congressional Budget Office shows that the deficit has declined by $200 billion, bringing it to where it was when Obama took office. Here’s the key passage:

The federal government’s fiscal year 2012 has come to a close, and CBO estimates that the federal budget deficit for the year was about $1.1 trillion, approximately $200 billion lower than the shortfall recorded in 2011. The 2012 deficit was equal to 7.0 percent of gross domestic product, CBO estimates, down from 8.7 percent in 2011, 9.0 percent in 2010, and 10.1 percent in 2009, but greater than in any other year since 1947. CBO’s deficit estimate is based on data from the Daily Treasury Statements; the Treasury Department will report the actual deficit for fiscal year 2012 later this month.

There’s an excellent chance that President Obama will tout this in upcoming speeches and campaign events. But that doesn't mean it's a good thing—a large portion of this is almost certainly the result of a conservative push for spending cuts to social insurance programs and other government services.

Not only does the smaller deficit hurt an economy still struggling with inadequate demand, but it doesn’t improve the nation’s balance book: The best cure for a large deficit is economic growth, and one way to achieve it in the current environment is continued government investment. A large deficit driven by stimulus will eventually pay itself off. A slightly smaller deficit produced by austerity will keep us on the slow slide to stagnation.

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