Fuzzy Treasury Math and Its Consequences

(Note: A version of this appeared on AlterNet earlier this week). If it sounds too good to be true, it’s probably false. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines.

Yet, so goes the current telling of the deficit story. When the Congressional Budget Office (CBO) proclaimed that its projected deficit for 2013 had dropped to $642 billion, there was nary a question asked about how that number was conceivable.

Real-wage stagnation, epic student debt, more low-paying half-jobs accepted out of desperation than moderate-paying full-ones being created, health costs out of control, an ongoing Congressional war over sequestered funds, more federal debt being created even if tempered by zero-interest-rate policy and yet, the media jumped on the make-believe-bandwagon of an incomprehensible turn-around in the government’s books, where the deficit had grown as a direct result of debt created to float the banking system. Somehow the deficit had magically nearly-halved from around $1.1 trillion last year.

A battle of philosophies

When the deficit was announced to have undergone some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The wondrous number, the ‘smallest shortfall since 2008’,  proved fiscal stimulus would ultimately boost the economy.  (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) 

Where there is truth to part of this  (austerity never helped anyone but those not impacted by it) it ignores the fact that a vast portion of stimulus has been mirrored by a policy of cheap money, asset bubble manufacturing and providing a parking spot for Treasury and bank debt on the Fed’s books. Nearly 80% of the Treasury debt created since the financial crisis of 2008 has not been raise to even plug a deficit, but to float a flawed financial system. Still, blind acceptance that any federal stimulus helps the population and not its financial institutions does economics and more importantly, the country, a disservice.

Free-market types also considered the reduced deficit a philosophical triumph. By not overly helping or regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal on its own. See! So more budget cuts of social, but not corporate, welfare are necessary.

But blind-belief in the headline figure weakens their cause, too. A true free-marketer would be against the Federal Reserve propping up the treasury department and the debt market by printing money, buying lots of new treasuries, or allowing banks to park them on their books (to the tune of more than $1.5 trillion worth in excess reserves) and by buying $85 billion in toxic assets per month from banks shifting their rotting positions to the Fed, thereby freeing up space to speculate in other ways, in a well-orchestrated accounting gimmick.

Those debates of course will continue on. Meanwhile, there’s the matter of what sparked them - the CBO’s estimate of the 2013 deficit, the number that measures what the government takes in vs. what it spends. Examining it, shows that not much has changed in the past three years. 

First, a hat tip to Karl Dennniger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go.  According to Denninger’s analysis of Treasury data, since September 28th 2012, “there has been a net $762.6 billion of new debt added to the Federal balance sheet, not the $488 billion the Treasury Department claims.”

He shows how the Treasury’s cash statement indicates that “At the current run rate … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, or,  about the same.  If you include figures through the end of April, that run rate produces a deficit of about $1.307 trillion.

Regarding the $642 billion headline deficit number, simple logic (and a read of the news) showed that neither US debts, nor its largest expenditures had dropped.  At first, I just assumed the Treasury Department was excluding something major from the figures that the CBO was using - but the math doesn't work even if it excluded lots of costs or pumped up lots of revenues.  

The Truth is In there

The evidence of the real deficit projection lies in the Treasury's own report of receipts and outlays, the Monthly Treasury Statement which compiles activity from the start of the current fiscal year (October 2012) through April 2013. 

A cursory look at this report reveals items that ulimately don't support the CBO’s cheery projections. (Warning: there’s some math coming up.) Take Table 1. Its shows there have been $1.603 trillion in budget receipts so far for fiscal year 2013 vs. $2.090 trillion in outlays. This indeed produces a value for a current deficit (outlays minus receipts) of -$487 billion.

The same table (and also Table 2) shows there were $1.383 trillion in receipts for the same period in 2012 and $2.103 trillion (about the same as this year) in outlays. Combining those figures, we do get a  comparative deficit this time last year of -$719 billion.  Okay, so far, so on point with the headline cheer.

However. Just below Table 1 comes some small print. The Treasury Department appears to have changed some accounting methods: "The deficit figure differs by $2.23 billion due mainly to revisions in the data following the release of the Final Monthly Treasury Statement."  There’s no clarity on how those revisions worked and they are small in the scheme of things, so let’s raise an eyebrow and move on – to the good part.

The Fuzziness

Even if the rest of this year's receipts continue to come in 16% greater than they did last year (which is what this table shows so far) - and there’s no particular reason why they should -  we'd get total receipts of $1.603 trillion plus an additional $1.237 trillion. That equals $2.839 trillion in total receipts for 2013. Remember that number for a moment.

Now, consider that even if  the rest of this year's expenditures remain flat to last year, there would be $3.538 trillion in total outlays for 2013. Subtracting that $3.538 trillion in outlays from $2.839 trillion in receipts, yes, we do get a total deficit projection of around $698 billion, about $56 billion higher then the figure the CBO announced, but what’s $56 billion give or take between friends?

Yet there’s more.  There’s Table 2. According to Table 2, expenditures won't be flat; they will be higher, and reach $3.684 trillion.

Subtracting $3.684 trillion from $2.839 trillion, we get an expected deficit of $846 billion, not the $642 billion figure that the media spread. Again, what’s about $200 billion between friends? But, adding in the extra debt from Denninger’s analysis of reports, that isn’t in this report, of $275 billion could put the real deficit figure closer to $1.12 trillion, where it’s been for the past three years.

There’s always some danger in working with numbers and estimates. The financial crisis predicated on mortgage prices and related assets rising quickly after speed bumps (which is what former Treasury Secretary, Hank Paulson said they'd do in 2007) showed us that. Numbers can be massaged and shrouded with suppositions.

But, that’s not the full case here. This is a case of performing addition and subtraction using the Treasury’s own report. And doing so, even absent wondering about assumptions or potential illusions, reveals a discrepancy between the recent headline deficit number and the one in the report.

Before we can discuss whether government stimulus works or not (and more importantly how programs are designed and who they benefit; sometimes people, often banks and corporatios), we should ask why some people are so eager to accept numbers or be right about the forest, that they run smack into the trees. Let’s at least see the main tree, here – the actual deficit figure - and then, we can move onto economic doctrine discussions. 

Comments

[dannyboy]

The deficit figure is a lie- to enable economic doctrine lies.

[DavidC]

Hello Nomi,
Knowing you've been working on your book (and I look forward to reading it!), a delight to read these two new postings with your usual forensic analysis. If the results of FACTS are positive or negative, at least treat the audience as thinking people, which is something you always do.

Thanks again, I hope now that the book is finished you are able to post more frequently!

DavidC