Wednesday, September 26, 2012

Fact 16a/7b: Temporary Spending Increases Are Not What Drives Long-Term Budget Deficits


It’s of course true that the stimulus (no quotes necessary, WSJ–it was real…and it worked) led to higher deficit spending when it was in place.  That’s the point.  In order to offset the private sector contraction, the public sector needs to TEMPORARILY ramp up economic activity, and it must do so with borrowed money (to raise taxes or cut spending to pay for stimulus would be to reverse its impact).

But the key word is “temporary.”  As seen in the figure below (or figure 1 in the link above), it’s not the stuff that gets in and out of the system that hurts you, deficit-wise.  It’s the stuff that stays in and isn’t paid for, like the Bush tax cuts, which continue to be the big story re what’s driving the medium-term budget deficit.

Above graph from Jared Bernstein: Recovery Act’s Contribution to the Deficit as Share of GDP 1009-19

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