Obamapologists have been pointing to the shrinking budget deficit as proof that the economy is heading in the right direction. There is a sense of desperation afoot to find something, anything, that can be positive news upon which Obama can rebuild his reputation. For the non-economists out there, a declining deficit does indeed sound indicative of a healthy economic rebound. However, the main reasons for this current shrinking deficit have absolutely nothing to do with Obama, nor do they affect the economy in the way it is being spun.
The first major reason for the deficit reduction has to do with Fannie Mae and Freddie Mac. These two government entities have given at least $140 billion, its “profit”, to the US Treasury so far in 2013. But this “profit“ was principally interest collected on mortgages which a) should have been earned by the private sector which the government took over by underbidding the private sector using taxpayer money, and b) by basically deciding that the private shareholders of Fannie and Freddie shouldn’t receive any part of the profit even though they had purchased – with their own money – substantial shares in the companies. These profits were required to be handed over to the US Treasury after the 2008 bailout conservatorship was amended with this change in 2012. Whether or not such action was legal is another question entirely.
The second large source of revenue was the frenzy of end-of-year tax paying in 2012. Remember the fight over the “Fiscal Cliff”? Because of the very substantial increase in individual tax rates for higher income earners, these individuals were able to accelerate 2013 income (including salary and bonuses) and dividends into 2012 to get the lower rate. Even more importantly, individuals that had gains on stock and real estate that they might not ordinarily have sold for years, all were dumped by the end of 2012 to get the lower rates. It should be noted that tax rates on dividends and capital gains for high income earners went up 59% – so much for Obama’s “the wealthy can pay just a little bit more”. The FY of the federal government runs October 1 to September 30, so those tax transactions, necessitating taxes to be paid by April 15, 2013, were recorded in the current fiscal year.
The Fannie/Freddie contribution and the end-of-the-year tax activity account for substantially all of the revenue increase and corresponding deficit reductions. They are one-shot deals, and are therefore not an indication of a rapidly growing economy.
Moreover, the most important thing to remember is that even with a lower deficit right now, Obama is still running huge annual deficits. Certainly no credit for deficit reduction should go to the Obama Administration, when total deficits still run over 4% of the GDP and are overwhelmingly higher than any of his predecessors in the history of our country (except during World War II). If true and lasting spending cuts, including entitlements, are not soon brought under control, we will be rapidly moving towards becoming Greece.