The budget deficit falls again

By Megan McArdle

Thanks to George Bush's amazing deficit reduction plan, the budget deficit is now only 1.2% of GDP. If this trend continues, by the time George Bush leaves office, the budget will be within a hair's breath of being balanced. I can only hope that Democrats don't squander this precious legacy of fiscal responsibility.

Just kidding! Not about the budget deficit, I mean, but about the reason for it. The reason the budget deficit has closed is a combination of economic growth and increasing inequality, which has allowed the government to collect more revenue on a smaller base. The rich really are different--they pay higher tax rates.

These are the perils of attributing economic activity to presidential will. Democrats who got angry when they read the first paragraph should note that the budget deficit is closing whether or not George Bush wants it to; broad trends in the economy dominate even large changes in tax rates. Likewise, the fact that Bill Clinton wanted to close the budget deficit doesn't mean he did; in fact, broad changes in the economy were a much more important driver of change.

Yes, one could argue (and Bob Rubin has) that closing the budget deficit a little made for amazing economic growth, thus raising tax revenues and allowing for even more deficit reduction. But the behavior of tax revenues under George W. severely undercuts this story. For reasons we still don't understand, though inequality clearly plays a large part, tax revenues started rising faster than the rate of economic growth under Clinton. This trend has continued under Bush. That--and neither Rubinomics, nor supply side magic--is why tax revenues in both administrations keep delivering huge upside surprises, regardless of whether the administration cut taxes or raised them.

This article available online at:

http://www.theatlantic.com/business/archive/2007/10/the-budget-deficit-falls-again/2124/