Buried on page 11 of my local paper this morning was a story about President Bush pointing out that the Federal deficit will decline again this year. Since most people would consider this a positive development I was naturally surprised that it got such little play. But I shouldn’t be. I view it as a continuation of what I call the "Yea, but" economy. In other words, all silver linings have a cloud with them. In over 30 years of studying, teaching and researching economics and finance, I have never seen a time period where there is more focus on insisting the economy is in some type of serious trouble.

Consider the deficit. When George Bush took office in January of 2001 there was a surplus equal to 1.3 percent of the economy. Industrial production peaked in June of 2000 and was declining. A recession officially began in March of 2001. It is hard to think of historically better timing for tax cuts than those passed in the Spring of 2001 for the purpose of fighting an economic downturn. Between the recession and tax cuts receipts declined from 19.8 percent of GDP to 16.3 percent in 2004. Federal expenditures rose from 18.5 percent to 19.9 percent of GDP, the majority of which was for national defense and homeland security. The result was a budget deficit in that year of 3.6 percent of GDP. This received much play in the media and from the President’s critics.

What has happened since usually winds up on the back pages. Tax receipts rose to 18.4 percent of GDP in 2006 with the deficit declining to 1.9 percent of the economy. My estimate for fiscal 2007 ending September 30th is a deficit in the range of 130 billion or so. This will put the deficit at around 1 percent of GDP. Using a conservative estimate of 8 percent revenue growth and allowing for Federal spending to grow at over 5 percent for the next two fiscal years gives a balanced unified budget in fiscal 2009. This presumes no expiration of tax cuts. I’m betting if Hillary Clinton, Barack Obama, or John Edwards is in the White House that will be front page news.