Update On the Deficit Front

Recently I highlighted the counterpoint to my fiscal pessimism.  Well, I'm back to highlight Scott Grannis's latest update.  Grannis is upbeat on the fiscal situation.  First is his attribution of the cause - gridlock.  Yes, beauteous, magnificent gridlock, the kind of which we fervently hoped for and worked hard to achieve in the 2010 elections.  That was the "shellacking" that changed everything.  We all have our gripes with Boehner and "establishment Republicans" yadayada, but Grannis's take is the proof...Republicans have done a pretty darned good job of keeping growth in government spending at bay despite the Obamacrats fervent desires to the contrary.

This rather extraordinary achievement was not due to any of his {Obama} initiatives, however. As the chart above shows, the big reduction in the deficit has been the by-product of flat to declining spending in recent years and multi-year increase in tax revenues. Most of the reduction in spending can be credited to a deadlocked Congress (which has ignored Obama's repeated requests for ever-rising spending), and to declining costs for social safety nets (mainly unemployment insurance, which still remains unusually high).

Second, the restraint in federal spending is a boon to the economy, based on supply-side logic

Then, as now, a huge decline in government spending failed—despite the warnings of Keynesian-trained economists—to generate a depression, and failed to send the unemployment rate skyrocketing. Supply-siders, in contrast, have an answer for what happened that makes sense: when the government controls fewer of the economy's resources, the private sector has more room in which to practice that in which it uniquely excels: entrepreneurship, cost-cutting, risk-taking, and productivity gains.

So, the news is upbeat, but remember this is a deficit analysis, not a debt analysis.  I retain my pessimism on the debt front.  We are still running structural deficits, albeit small as per Grannis, and and our debt is dangerously close to being unpayable as it is.  Furthermore, we are rapidly bonding long hidden liabilities that have lurked in our entitlement programs.  We will need Grannis optimistic trajectory to hold for many years into the future to make the debt picture look brighter and reduce the risks associated with a debt crisis.