The budget deficit will shrink to its smallest level since before the Great Recession in 2013, and it will continue shrinking through 2015, according to revised estimates from the Congressional Budget Office released Tuesday. In reality, the deficit is even smaller than the CBO predicts, since its “current law” projections assume that funding for the war in Afghanistan and federal disaster relief for states hit by Hurricane Sandy will continue in perpetuity. But that funding isn’t endless, and it will bring the deficit down to even smaller levels.

Still, under CBO’s projections, the deficit is now half as large as it was in 2009, the year President Obama took office:

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

The deficit is shrinking so rapidly because of spending cuts and new revenues and because CBO continues to revise down projected health spending. But that the deficit is shrinking so rapidly isn’t necessarily good news — as U.S. News and World Report’s Pat Garofalo put it, it is instead “one more piece of evidence showing that the economic discussion that has gripped Washington recently is absurdly backwards.”

Despite smaller deficits, congressional Republicans remain focused on spending reductions, and the most recent round of cuts has kicked children out of preschool, left cancer patients without needed screenings, and gutted programs that help low-income Americans in a variety of ways. Those cuts have also threatened to derail the economic recovery, which has sputtered along despite the headwinds created by a consistent focus on deficit reduction. In past recessions, increased government spending has pulled the U.S. to recovery. In this one, it has only made recovery harder.

The crisis the U.S. is facing isn’t the deficit. It’s that the unemployment rate is still 7.5 percent, and more than 4 million of those workers have been off the job for at least six months. A shrinking deficit might be good news in the long-term, but it isn’t putting people back to work or sparking a robust economic recovery. And yet, even with evidence that stimulus policies like the American Jobs Act would help, and despite the fact that the deficit continues to subside, congressional Republicans aren’t just ignoring the devastating impacts of sequestration — they are pushing for even more spending cuts in the immediate future.

Giving government-sponsored mortgage giants Fannie Mae and Freddie Mac the authority to allow homeowners to reduce the amount of principal they owe on their mortgages would save taxpayers billions of dollars while reducing the number of foreclosures and delinquencies, according to a new report from the nonpartisan Congressional Budget Office. The report was done at the request of 45 House Democrats who have pushed the Federal Housing Finance Agency (FHFA) to provide Fannie and Freddie with that authority.

The CBO analyzed three separate scenarios for principal reductions under the Home Affordable Modification Program (HAMP), which largely failed to provide sufficient help to homeowners after it was instituted by President Obama in 2009. Any of those scenarios, the report found, would save taxpayers billions of dollars and avert unnecessary defaults and foreclosures.

Acting FHFA director Edward DeMarco has been the primary foil to the institution of principal reductions, as he has argued that they wouldn’t be effective, that they wouldn’t be fair, and that they would be giveaways to big banks. Multiple reports, however, have shown that principal reductions would be the most effective way to help homeowners while also shielding taxpayers. The effort to give Fannie and Freddie the authority to reduce principal got a shot in the arm Wednesday when President Obama nominated North Carolina Rep. Mel Watt (D) to replace DeMarco at FHFA. Watt is an outspoken proponent of principal reductions.

The three scenarios CBO tested would not have a tremendous effect on the housing market, as it would produce fewer than 600,000 modifications and avert fewer than 100,000 defaults. Still, it shows that principal reductions would be a smart policy for both taxpayers and struggling homeowners, and a more ambitious plan could have an even bigger effect. “”Policies with broader eligibility than those CBO analyzed could have larger effects,” the report said.

Between the new-and-improved Simpson-Bowles plan, Joe Scarborough’s feud with Paul Krugman, the relentless drumbeat of the entire Republican Party, and the media blitzkrieg launched by the billionaire-driven “Fix the Debt” campaign, one might think no serious and responsible American can ignore the unassailable truth: America faces a debt crisis, which we must act on immediately and decisively.

Well, not quite. The actual truth is that the debt everyone’s freaking out about does not exist.

Some of the debt certainly exists, like the roughly $11.6 trillion owed to foreign and private creditors. But that isn’t the debt anyone’s worried about. If we stopped adding to it tomorrow, the debt as it stands would pose essentially zero threat to the country’s fiscal health, as the ongoing growth of the economy would send our debt-to-GDP ratio dropping like a rock.

So the debt that’s got everyone worried is the part we haven’t yet incurred. And that debt, by definition, does not exist. It’s not a certainty, it’s merely a projection by the Congressional Budget Office. And trying to model how the federal budget, not to mention the entire American economy, will behave years or even decades in the future is a devilishly treacherous business.

For instance: one of Rep. Paul Ryan’s (R-WI) favorite talking points in 2011 was that the computer simulations CBO uses to model the economy crash when they attempt to account for the debt load in 2037. Imagine trying to model the 2011 economy in 1985. Things you’d never see coming include (among other things) the Internet, fracking, massive advances in computing power, the renewable energy boom, three wars, a massive recession, and Harry Potter. And predictions can be hard even over shorter time frames. In 1995, CBO predicted the deficit in 2000 would be well over $200 billion. We ran a surplus of $236 billion.

In fact, Ryan plastered dramatic graphs of debt going out 75 years onto everything in sight while stumping for his last budget. Forget predicting 2011 in 1985. That’s like predicting 2011 in 1940.
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Last September, the non-partisan Congressional Research Service released a report showing that tax cuts for the rich — contrary to GOP orthodoxy — have minimal effect on economic growth or job creation. Instead, they simply increase income inequality. Republicans pressured the CRS to pull the report down; it was eventually re-posted with the same conclusions.

Last month, another non-partisan agency, the Congressional Budget Office, released an analysis showing that one of the GOP’s favorite corporate tax ideas would end up pushing jobs overseas. Again, instead of reexamining their ideas, Republicans are attacking the messenger:

The Congressional Budget Office is defending a recent report on how U.S. multinational corporations are taxed, after a top Republican criticized the analysis as biased. [...] “This report purports to provide an even-handed review of different policy issues related to the taxation of foreign source income,” [House Ways and Means Committee Chairman Dave] Camp (R-MI) wrote to [CBO Director Doug] Elmendorf last month.

“However, a closer analysis of the report reveals that it is heavily slanted and biased in favor of one specific approach to the taxation of foreign source income – and relies heavily on sources that tend to support that conclusion while ignoring sources that support a different conclusion,” he added.

Elmendorf defended the report, saying it “presents the key issues fairly and objectively and that its findings are well grounded in economic theory and are consistent with empirical studies in this area.”

The GOP’s idea — known as a “territorial” tax system — would permanently exempt U.S. corporations from paying taxes on profits they make overseas. CBO found such a system would result in “increasing incentives to shift business operations and reported income to countries with lower tax rates.”

One effect of the Great Recession was to massively widen the gap between the amount of wealth the economy could be producing and what it actually was producing. GDP production dropped almost $1 trillion from its pre-recession trend line, and between 2008 and 2011 the United States lost around $3.6 trillion.

CBO’s “current law” baseline, which assumes the nation goes over the so-called “fiscal cliff,” does not show a return to potential GDP until 2018. However, as the Economic Policy Institute noted yesterday, CBO’s predictions over the last three years have repeatedly pushed back the date of the recovery, suggesting there’s no guarantee it actually happens:

CBO’s most recent forecast shows recovery rapidly accelerating starting in late 2013, with real GDP growth averaging 4.5 percent over 2014—2016 (more than twice trend growth since recovery began); this spurt of growth exceeding potential GDP growth would close the output gap.

Should we bank on this recovery? Probably not, even though it seems that most of the deficit reducing industrial complex in D.C. is banking on it.

As an empirical matter, the CBO projections have consistently issued premature dates for when full recovery will occur; the 2014 recovery expected back in CBO’s Jan. 2010 forecast is now projected for 2018. And so on.

Part of the problem is that economies can get into negative as well as positive feedback loops. If unemployment is high and the bargaining power of employees is low, that can weigh down wage and price growth. If those grow slowly, it takes much longer for households to pay down their debt, further delaying the recovery.

But a deeper problem is that CBO’s projections of an approaching recovery don’t just build in assumptions about how the economy will behave. It builds in assumptions about how policymakers will behave as well. It assumes that the Federal Reserve responds to a recession by opening the spigot and loosening monetary policy. It assumes that safety net spending automatically increases to meet the needs of more Americans thrown into hardship.

But those policies are choices, influenced by the culture and ideology and worldview of policymakers. They are not inevitabilities, as the Republican Party has repeatedly demonstrated with its determination to rein in the Fed and impose austerity. Zooming out to the international scene, Carmen Reinhart and Kenneth Rogoff’s finding that systemic financial collapses lead to much slower recoveries is driven to no small degree by policymakers’ tendency to react to recessions with self-destructive choices. Conversely, if countries can buck the conventional wisdom that government must “tighten its belt” when individual families are tightening theirs, real good can be achieved.