Why Would Markets Be Unnerved by Deficits in Line with Projections?

27th November 2018 Off By binary
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The Washington Post told readers that when the deficit figures for 2018 were released last month:

“The announcement unnerved Republicans and investors, helping fuel a big sell-off in the stock market.”

The claimed impact on the market seems implausible. In April, after analyzing the effect of the tax cuts, the Congressional Budget Office (CBO) projected the deficit for the 2018 fiscal year would be $804 billion. The figure for the deficit that was reported last month was $779 billion, $25 billion less than what CBO had projected six months earlier. It is hard to believe that a deficit that was slightly lower than projected could cause a big sell-off in the stock market.

It is also worth noting that this piece makes zero effort to put any numbers in context. Since almost none of the Post’s readers has any idea of the meaning of the deficit and debt numbers used in the piece, it is difficult to see why they would use them. It is not hard to express these numbers as a share of GDP and relative to the size of past deficits, measured as a share of GDP. In fact, CBO actually expressed the deficits and debt as shares of GDP in its report, so it is not even necessary to do the arithmetic.

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