America Will Be Shocked When This Deficit Chart Comes True

When it comes to projecting the deficit (or anything, really) forecasters have a tendency to overweight what's happening right at the time they're making the forecast.

So for example, during the late 90s, the CBO imagined ongoing surplus, and the eventual end of the national debt.

Now a phrase you hear a lot is "trillion dollar deficits as far as the eye can see."

But some of the best economists are predicting a rapid diminishing of the deficit.

In his 10 Questions For 2013 note, Goldman's Jan Hatzius wrote:

By 2015, we expect the federal deficit to be down to $500bn, or just under 3% of GDP. If this forecast is correct, concerns about the federal deficit are likely to diminish over the next few years.

Why will the deficit fall in half like this? Because of what we've been writing about a lot, lately: Deficits aren't about spending and taxes. They're about growth or lack thereof. For decades deficits as a % of GDP have been closely correlated with economic improvement.

This chart of deficits as a % of GDP (red line) vs. the unemployment rate (blue line) is uncanny, holding tight across multiple fiscal regimes.

Bill McBride of Calculated Risk put together a deficit projection that's pretty closely in line with Hatzius'. If it plays out, America will be shocked.