A couple of points

First, I am a bit late to this Op-Ed by Charles Koch but it so plainly illustrates a common fallacy I have to bring it back up. Koch writes

Years of tremendous overspending by federal, state and local governments have brought us face-to-face with an economic crisis. Federal spending will total at least $3.8 trillion this year—double what it was 10 years ago. And unlike in 2001, when there was a small federal surplus, this year’s projected budget deficit is more than $1.6 trillion.

The clear implication is that our budget deficit is the result of overspending. Now there are a lot of reasons people will point to as to why that’s not the case this time, the economy, the Bush Tax cuts, etc.

However, I want to make the more general point that spending is pretty much never the cause of budget deficits. Or, to be a bit more formal, variations in spending do not predict variations in the deficit. Variations in tax revenue, however, do predict variations in the deficit.

We can look at the US experience quickly

FRED Graph

The blue line is spending, the redline is tax receipts, the green line is the deficit. Actually the green line is “government savings” which is the inverse of the deficit. So when the green line goes down the deficit gets bigger.

You can see that dips in the redline are associated with dips in government savings. Surges in the redline are associated with surges in government savings.

Now of course the deficit is mechanically related to spending and revenues, so what does it really mean to say that revenues are “more predicative.”  It simply means that revenues bounce around more than spending and where revenues bounce so does the deficit. Spending is more or less smooth. Its only real changes are associated with war and peace.

Which brings me to a second point. Arnold Kling says

Everybody talks about a monetary "exit strategy" once a strong recovery takes hold. But what about a fiscal exit strategy? Other than Ron Paul, does anyone have several hundred billion in spending cuts ready to go?

Tyler Cowen’s NYT column is on what he calls "fiscal illusion." Maybe it should be the "fiscal allusion," because he alludes to so many things, or the "fiscal elusion," because the implications of his writing may be elusive. But one interpretation is that we need fiscal rules, because discretionary fiscal policy is biased toward deficit. That is, the Keynesian prescription is for surpluses when times are good and deficits when times are bad, but the Keynesian prescription is only taken when times are bad.

There are a myriad of problems that cause the Keynesian prescription of saving when times are good and deficits when times are bad to go awry.

However, one of them is that continued emphasis on the spending side of the budgetary equation. Arnold is looking at spending cuts as an exit strategy. Both proponents and detractors of stimulus use the word as a synonym for government spending.

It would be simpler and easier if stimulus were a synonym for broad based tax cuts. For example, small and potentially ineffectual as it might have been, no one is talking about how we need to keep the tax rebate of 2008 going.

The Making Work Pay Credit of 2009, 2010 was similarly jettisoned though there was a 2% payroll credit in its place. Still I predict that will be gotten rid of when its term expires as well.

No one has a problem letting broad based tax cuts go. They have a problem letting upper income tax cuts go and entitlement spending go. So, lets steer the focus towards broad based tax cuts as the Keynesian remedy.

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