The Federal Deficit Reduction - Growth Helps at the Margin

By: Paul Kasriel | Tue, Apr 13, 2010
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The experts - no, not Alan Greenspan and Robert Rubin, but the CBO - tell us that we cannot grow our way out of the long-term federal budget deficit, but the acceleration in real and nominal economic growth the U.S. economy has experienced in the past two quarters is helping to reduce the deficit in the short-term. When growth picks up, corporate profits and household income do too. Thus, tax revenues pick up, or at least do not contract as much. When growth picks up, the rate of increase in unemployment insurance benefits, food stamp expenditures and Medicaid expenditures slow down, not to mention government capital injections into teetering financial institutions. The chart below shows that in the 12 months ended March 2010, cumulative federal outlays grew by 3.9% vs. March 2009 - the slowest growth in outlays since October 2007's 2.7% and down considerably from July 2009's 19.2%. The rate of contraction in revenues is slowing. In the 12 months ended March 2010, cumulative federal revenues contracted by 12.6% vs. March 2009 - an "improvement" over November 2009's contraction of 17.6%. To reiterate, we will not be able to "grow" our way out of our long-term federal deficit/spending challenges, but it is important to appreciate that some of the recent surge in federal government spending and the federal deficit was due to the cyclical impact of the deepest and longest recession since the 1930s.

Chart 1
12-Month Cumulative Federal Government Outlays and Receipts - Year-Over-Year Percent Change



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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