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The incredible shrinking deficit

If we're going to have a debate over fiscal policy, it should be rooted in reality. And the reality is, we're witnessing deficit reduction at a remarkable clip.

Closing the books on a fiscal year in which the federal budget deficit fell more sharply than in any year since the end of World War II, the Treasury Department reported on Thursday that the deficit for 2013 dropped to $680 billion, from about $1.1 trillion the previous year. In nominal terms, that is the smallest deficit since 2008, and signals the end of a five-year stretch beginning with the onset of the recession when the country's fiscal gap came in at more than $1 trillion each year. As a share of the nation's economy, the budget deficit fell to about 4.1 percent, from a high of more than 10 percent during the depths of the Great Recession.

Note, this points to the deficit for the 2013 fiscal year. We won't know the deficit for 2014 until October, but it's projected to be even smaller.
Also keep in mind that yesterday's Treasury report confirms the preliminary projections we reported on last fall.
The sharp reduction in the deficit last year was boosted in large part by increased government revenue. At the start of the year, the wealthiest taxpayers began paying slightly higher taxes -- a policy Republicans said would slow the economy and cause lower federal receipts. We now know GOP policymakers had it backwards: "The Treasury said revenue climbed $324 billion, to $2.8 trillion, from 2012 to 2013. That is growth of around 12.9 percent, reflecting both higher income tax rates and the strengthening economy."
Regardless, deficit hawks -- a contingent I am not a part of -- have to reason to be thrilled. It may be a well-kept secret, with polls showing the vast majority of Americans assuming the deficit is growing quickly, but the reality is the United States hasn't seen this much deficit reduction, this quickly, in about 80 years.
In theory, this should matter to federal policymakers quite a bit.
But congressional Republicans -- the folks who had no qualms about rising deficits during the Bush/Cheney era -- continue to insist deficit reduction must take priority over pressing national needs. Yesterday, GOP senators went so far as to block a bill on expanded veterans' benefits, partly out of fears the proposal might increase the deficit a little.
This is a misguided concern. The deficit is now down $400 billion from last year, and down nearly $800 billion from when President Obama took office, but much of the right still focuses on this as a national crisis, while characterizing the White House as fiscally irresponsible for reasons that don't seem to make any sense.
To reiterate a point from October, it's important to emphasize that I don't consider rapid deficit reduction good news. On the contrary, I strongly believe the nation should be borrowing more, not less, taking advantage of low interest rates, investing heavily in infrastructure, creating millions of jobs, and leaving deficit reduction for another day.
That said, if we're going to have a debate over fiscal policy, it should be rooted in reality, not silly misconceptions. And the reality is, we're witnessing deficit reduction at a remarkable clip.