Deficit Sense – or Sense Deficit?

I suppose this is simply too complicated for a lot of people to understand, and that’s why we have so many nutty deficit hawks:

Evaluating deficit numbers isn’t as easy as up-is-good and down-is-bad. In a recession, the deficit is driven as much by the economy as by the government’s decisions. High unemployment means there’s less income to tax. Sagging demand means there’s less in the way of corporate profits to tax. And general economic misery means that programs such as Medicaid and unemployment insurance become much higher because more people need to use them. Deficits are often seen as the product of federal spending, but they’re just as much the result of changes in the broader economy. The government’s balance sheet is tied to, not separate from, the economy.

When the economy improves, the deficit outlook gets better even though the government hasn’t decided to cut spending or raise taxes. But as DeLong’s post suggests, even that’s not so simple: Textbook Keynesian economics suggests you want to run high deficits during recessions because you need to increase demand after individual and business dollars have fled the economy. But if you remove those deficits at the first sign of recovery, you could remove the very factors that are supporting the economy, which could in turn make the recession worse. So lower deficits during a recession could mean a worse economy, and higher deficits might be a sign that the government is willing to do what’s necessary to get the economy back on track.