Confusing the Size of the Deficit with the Size of Government

I was going to write a post saying that there are two separate debates right now that are getting confused. One is over the deficit and how to rein it in, the other is over the size of government. You can have a large government with no deficit, or even a surplus, and a smaller government with a big budget problem. The two are not necessarily related.

But what Republicans have realized is that most people assess whether government is too big or too small using the deficit. If the government is running a deficit year after year, then it must be purchasing more than it can afford.

The problem, I think, is a false analogy with a household. When a household is in deficit month after month after month, it is a sign that the household is overspending relative to its income. And, since in most cases income cannot be changed in the short-run, or even in the long-run, a household in budget trouble has little choice but to work on the spending side of the equation.

However, the government’s income is different from a households. The government has powers that households do not have, the power to change taxes. An increase in taxes will raise the government’s income and help to solve the problem. The right has tried to convince us with Laffer curve nonsense that this margin cannot be adjusted, i.e. the false claim that tax increases will not increase revenues, and they have also made arguments about employment and economic growth. Or they have simply proclaimed, without justification, that tax increases are off the table.

None of those argument withstand closer scrutiny, but they are an easy sell due to the willingness of households to project their own troubles with balancing their budgets onto the government. Deficits mean spending cuts.

But like or or not, tax increases are going to be part of the solution. Spending cuts alone are not going to be sufficient. Right now the Republicans are winning the battle to influence the public’s opinion, and their hope is to cut everything they possibly can that they disagree with ideologically — no small number of programs — before the realization that tax cuts are needed too becomes clear to the public.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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1 Comment on Confusing the Size of the Deficit with the Size of Government

  1. the u.s is basically in denial. face up to the fact that america is completely flat broke, destitute level broke.accept, deal with and cut spending. we got a year or two and we will virtually collapse. printing cash has run it’s course, we’re out of options

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