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Federal budget update




The good news about the Federal budget data recently released for February is that the deficit continues to shrink (albeit modestly) relative to the size of the economy, and the growth of revenues—which has been about 10% per year for the past year or so—continues to outpace the growth of spending, which is rising about half as fast. This is as it should be in the early years of a recovery.

The bad news is that the deficit is still huge, at $1.3 trillion in the past 12 months, and represents about 9% of GDP. That's big and bad by any standard. Keynesians have preached for years that big deficits like this are stimulative, but we have now proven beyond a shadow of a doubt that big deficits that are driven by lots of spending and transfer payments act only to slow the economy's growth. That's because they consume a significant portion of the economy's resources in a very inefficient manner. In short, they reduce the economy's overall productivity, and that results in a slowdown in the rise of living standards.


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