The indispensible Stan Collender does us the service today of republishing, in Capital Gains and Games, his new Roll Call column examining last Wednesday's Monthly Budget Review from the Congressional Budget Office.
As Collender notes, the release, that same day, of the CBO's analysis of the Baucus healthcare reform bill caused most people to miss the news that the final Fiscal Year 2009 budget deficit for the U.S. government had dropped to $1.4 trillion. That's down from a $1.6 trillion estimate made in August by the CBO, which itself was a downgrade from a $1.8 trillion initial estimate made early in the year.
No matter how you slice it, $400 billion is a lot of a money -- almost equivalent to the entire budget deficit for 2008.
Big swings in deficit projections are often due to dramatic changes in economic conditions, but that wasn't the case this time. Rather, the original estimate included two things that simply didn't happen: $250 billion in additional bailout money that the White House included in its budget but ultimately didn't request, and a plan to score Fannie Mae and Freddie Mac as federal entities.
The decision not to request the additional bailout money is a consequence of the stabilization of the financial sector. Whether you agree or disagree with how the Obama administration went about calming the waters, one thing is clear, back in the spring, the government thought getting to where we are now would be much more expensive. So that's a positive.
The issue with how to "score" Fannie Mae and Freddie Mac is more complicated.
In the CBO report released in August, The Budget and Economic Outook: An Update, the CBO concluded that since Fannie Mae and Freddie Mac had been placed under a government conservatorship, "the extraordinary degree of management and financial control that the government now exercises over them... [implies] that the entities should be considered federal operations." The CBO then calculated that the current liabilities of the two GSEs added up a drain of $291 billion on the budget.
But in fact, the net cash injections poured into the Fannie Mae and Freddie Mac by the U.S. Treasury in fiscal year 2009 only added up to a little over $100 billion. Thus the reduction, overall, to $1.4 trillion.
$1.4 trillion is still a huge deficit, of course. And Fannie Mae and Freddie Mac could still blow up, leaving the Treasury on the hook for hundreds of billions of dollars. But maybe they won't. Maybe the economy will continue growing after the current quarter and into next year. That in itself would have vast implications for the deficit. It is critical to remember that according to the CBO, the most significant contributor to the budget deficit was a massive $420 billion decline in tax revenue registered in 2009 compared to 2008. A growing economy will result in growing tax revenue, which will, all by itself, cut the deficit.
Keynesian fiscal stimulus aims to encourage economic growth. Therefore, Q.E.D., fiscal stimulus is a long-term deficit reduction strategy.