Is a Falling Deficit Good News?

Last Updated Apr 13, 2010 3:37 PM EDT

Why are we happy that we are cutting the deficit at the beginning of an economic recovery?:
Deficit: This Is Not Good News, by Brad DeLong: David Cho writes:
The federal deficit is running significantly lower than it did last year, with the budget gap for the first half of fiscal 2010 down 8 percent over the same period a year ago, senior Obama administration officials said Monday. The officials attributed the results to higher tax revenue and to lower spending than projected on bailing out the financial system. If the trend continues for the rest of the year, it would mean the annual deficit would be $1.3 trillion -- about $300 billion less than the administration's projection two months ago for 2010...
This is bad news: unemployment is higher than it was a year ago, and so the deficit ought to be higher...
Stan Collender says this signals four things about how the administration is thinking:
  1. Unless there's an additional economic downturn that few are currently expecting, it's not going to propose any further stimulus efforts.
  2. The White House doesn't believe that any additional stimulus will get through Congress this year.
  3. Stimulus and a stimulative fiscal policy are no longer topics the White House wants to discuss.
  4. The administration believes that now is the time to begin to talk about deficit reduction.
But will talking about deficit reduction translate into votes?:
The false hopes effect, Monkey Cage: Via a correspondent, David Cho of the Washington Post engages in some unlicensed political science.
But by suggesting the deficit may have peaked, administration officials are taking a political gamble. If the favorable number does not hold up in coming months and the budget shortfall surpasses the $1.4 trillion recorded last year, voters in the November midterm elections could punish the Democrats for offering false hope.
It is certainly true that the electorate 'could' punish the Democrats for offering false hope on the deficit. But it's also possible that the electorate 'could' punish the Democrats for how much Tim Burton's latest movie sucked, for increases in shark attacks, or for failing to prevent the massive invasion of green alien space monkeys that's due to take place this summer. Actually, there is some interesting evidence on the shark attacks. The false hopes, Alice in Wonderland and green space monkey effects? Not so much.
The electorate could also punish the administration for high employment numbers. Is that a real worry? Yes, but apparently it's more about the rate of change in employment than the level. That is, so long as the unemployment rate is falling at a decent rate as the election approaches, the actual level isn't so important. Thus, from a political vote-getting point of view, if the administration believes that employment will be falling near the elections, as it seems to believe, there's little reason to spend the politi8cal capital it would take to try to bring the unemployment rate down faster.

But taking a different view, one that focuses on people rather than votes, there is a reason to help households struggling to find employment. Even if there is little political gain to doing so, every job that is created changes the circumstances some household faces for the better, and that alone ought to be enough motivation to do as much as possible to help. But Stan Collender is correct, as I explain here, to conclude that the administration has no plans to even propose doing more to help. No matter what effect that decision has on votes, with households still struggling to find decent jobs, or any job, I think that's the wrong choice to make.

Update: I should have noted that the source of the falling deficit -- higher than anticipated output growth translating into higher tax revenue and lower demand for social services -- is good news. The bad news is that there's no chance that the extra revenue will be used to provide further support to employment. The benefit from the reduction in the deficit, which is small, is less than the benefit from helping to accelerate job growth, but the administration is not even trying to make that case.
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    Mark Thoma is a macroeconomist and time-series econometrician at the University of Oregon. His research focuses on how monetary policy affects the economy, and he has also worked on political business cycle models. Mark is currently a fellow at The Century Foundation.

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