Monday, November 8, 2010

Growth Matters when talking about Deficit

I've seen people post this:
Be skeptical when people say we had a structural surplus under Clinton. We had a surplus based on some very, very optimistic projections about what the internet was going to do to the economy. Bush made it worse with the wars (no denying it - not sure the tax cuts were as bad as everyone makes them out to be, but the wars certainly were) just saying the idea that we had a structural permanent surplus in 2000 was a little fanciful. People are really bad at understanding cycles - whenever people say ANYTHING about the "2000s under Bush", they have to realize they're starting with the biggest bubble we've ever had and ending with one of the two or three worst recessions we've ever had. If I drew you a graph of cycles and the bottom in 10 years matched the top of 06, it'd potentially mean we're doing really well depending on how cyclical we are.

More generally , deficits only matter in the context of growth - a 2% deficit is a big deal with 0% growth and it's minor with 5% growth. You don't have to believe that the Republicans are fiscally responsible from a spending perspective if you believe they're more pro growth. A low-tax driven deficit is better than a high-spending driven deficit because low taxes recover part of the losses through growth (and from an overall economy perspective are a positive) whereas high-spending doesn't, really. It's amazing how many economic and distributional things don't matter when you grow because the problems just take care of themselves. This is great in theory, but when you find out things like "the estate tax is a massive growth killer" or "high income taxes and high poverty transfer payments kill growth", that's where the rubber really meets the road. Growth isn't usually free.


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