In a recent speech marking the five-year anniversary of the financial crisis, President Obama hailed the falling federal deficit by pointing out that, “our deficits are going down faster than any time since before I was born.” The reduction in the deficit between 2012 and 2013—from 6.8 percent of GDP to 3.8 percent—is the largest deficit reduction in the past 60 years. Contrary to how too many pundits and politicians think about the economy, that’s not a good thing. This rapid contraction in the budget deficit has sucked purchasing power out of the overall economy even while it remains severely demand-constrained following the Great Recession.

The figure below shows the federal deficit, which has been steadily falling relative to GDP since 2009, versus the trend in the output gap, an indicator of how close to full recovery the economy is. The output gap is the difference between what economic output would be if resources were fully employed (potential output) and actual output, expressed as a percent of potential output.  The stagnation in the output gap—which is mirrored by stagnation in the share of working-age adults who are employed since the official recovery began—is caused in large part by the steep contraction in budget deficits.

The federal deficit reached a high of nearly 10 percent of GDP as a result of the Great Recession—the worst economic downturn since the Great Depression—and the government’s response to the recession. While the deficit has fallen since 2009, the output gap has remained stubbornly high at about 6 percent. History, as well as Europe’s recent financial and economic crises, clearly indicates that austerity measures reliably smother chances for a robust economic recovery. In short, it’s time to stop celebrating steep recent declines in the budget deficit.