The Shrinking Deficit and Our Shrinking Economy
The rapidly falling deficit does not "put the US in a strong fiscal position."
I thought I was done writing for today, but I just stumbled across this post, and it got under my skin. It’s probably behind a paywall for many of you, so I’ll just quickly summarize.
The US Treasury Department has reported that “for the first ten months of the fiscal year, which ends Sept. 30, the deficit was $726 billion, down sharply from $2.5 trillion in the same period last year. That’s a record $1.8 trillion narrowing.”
In the month of July, receipts rose 3% while outlays fell 15%. According to Tom Simons, an economist at Jefferies and Co., this is great news because it puts “the U.S. in a strong fiscal position.” From an MMT perspective, that’s a silly thing to say. As I explain at length in my book, the number that falls out of the budget box at the end of each fiscal year doesn’t really tell you anything about the “strength” of the U.S. government’s fiscal position.
In fact, as I recently wrote, Democrats are bragging about a historic collapse in the government deficit even though it is pushing the US private sector into a weaker financial position.
Anyway, fiscal policy has become a major drag on economic growth. That’s been confirmed by Treasury Secretary Janet Yellen, and you see it in the estimates from The Hutchins Center on Fiscal and Monetary Policy, which show that the massive collapse in the government deficit reduced GDP by 3.8% over the past year.
Some of the shrinkage in the deficit occurred because higher nominal GDP growth (driven by rising inflation) generated strong tax receipts even as real GDP contracted. But the rapid withdrawal of pandemic relief has accelerated the collapse in the deficit, which undoubtedly helped to shrink our economy in the first half of the year.
I listened to your book with great interest, but I felt that you never fully described the policy choices in an inflationary period. (Maybe you have more recently, but I am new to this blog,) Isn't the policy choice to raise taxes in an inflationary environment? Doesn't reduced spending in turn reduce inflationary pressures? Inquiring minds want to know!!
Thanks, that is a good point. As an observer and an engineer I would say we need better control of our economy as it seems to overheat and crash regularly. It would be negative feedback in a electronic control device. Our automatic stabilizers seem to need help the economy on an even keel and proper heading.
I still have questions about the effectiveness and unintended consequences of a Federal Job guarantee: inflation impact, productivity, and political headwind.
I have wondered if anyone has proposed a variable income tax that would be keyed to inflation as an economic stabilizer. They could adjust personal and corporate taxes within a range (say + or - 4% or so) around a neutral base tax rate set by congress.