... we have two political parties and two approaches to the trillion-dollar budget deficit. The liberal approach is to raise taxes and the conservative approach is to slow the growth of government expenditures.
A smarter concept of fiscal policy balance is one that prioritizes outcomes (more jobs, faster growth, less poverty) over inputs. The goal of good fiscal policy is less about equating revenue with outlays and more about the fiscal mix which optimizes long-term prosperity. The fact that the liberal “War on Poverty” launched half a century ago has failed to make a dent in poverty is a sign of the government’s imbalanced thinking. Balance means putting incentives for job creation first, not good intentions to alleviate suffering.This growth-oriented approach makes a lot of sense, and we can already see how. As the chart below shows, tax revenues have been rising for more than two years, without any increase in tax rates, and even though this recovery has been the weakest on record; revenues are up because more people are working, incomes are rising, and corporate profits are strong. Revenues always rise in a recovery, and the stronger the recovery, the more they rise. Meanwhile, federal spending has been almost flat since the recession ended, thanks largely to Congressional gridlock. (Though this happy combination is not likely to persist much longer if entitlement programs are not cut back.) For now, the result is a welcome decline in the deficit as a percent of GDP, from a high of 10.5% at the end of 2009, to 8.5% today. We have also seen a welcome decline in spending as a percent of GDP, from a high of 25.2% in Q3/09 to 23.5% today. Much more remains to be done, but it is not impossible at all.