Wednesday :: Sep 15, 2010

Rising tax revenues unexpectedly reduced August deficit

by Turkana

Well, this is a surprise:

The U.S. government posted a smaller budget deficit in August compared with the same month last year, helped by rising tax receipts.

The excess of spending over revenue totaled $90.5 billion last month, smaller than the median forecast of economists surveyed by Bloomberg News and down 13 percent from $103.6 billion in August 2009, according to a Treasury Department report issued today in Washington. The gap for the fiscal year that started in October was $1.26 trillion compared with $1.37 trillion last year at the same time.

The economic recovery has helped generate more tax revenue for the Treasury, even as the Congressional Budget Office forecasts the deficit this fiscal year will reach $1.34 trillion, the second-largest on record.

Got that? The deficit unexpectedly came down due to rising tax revenues, not due to reduced government spending. It's almost as if stimulating the economy is a better idea than going the austerity route. Which might even lead one to conclude that we need even more stimulus rather than a Catfood Commission that's considering reducing government spending. As in Keynesianism works. If only the Democrats would make the effort to sell it. As Paul Krugman recently wrote, in reference to the deficit spending that helped end the Great Depression:

Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.

And that's what the Democrats should be explaining. The Obama stimulus helped. Not only did it stave off a depression and save millions of jobs, but the jolt it gave to the economy raised tax revenues which reduced the deficit. The Republicans and other deficit hawks want people to believe that government spending is the problem, but in a severe recession they are exactly wrong. As Krugman wrote in January:

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

And that's what this election year really should be about: a conservative economic model that will reverse the gains we have made, or more of the liberal economic model that has been working. The Obama stimulus helped. It didn't help enough because there wasn't enough of it. We don't need less of it, we need more of it, and more of it targeted at the people that most need it. This shouldn't be hard to sell, if the administration and Congressional Democrats would only make the effort. The economy remains in great danger, it needs even more stimulus, and only the government can provide it.

Turkana :: 1:29 PM :: Comments (25) :: Digg It!