ARTICLE SUMMARY AND RESPONSE: THE FEDERAL DEFICIT
Richard Dekaser draws a distinction between cyclical deficits and structural deficits, and maintains that cyclical deficits are not necessarily detrimental. Indeed, he suggests that they are desirable (Dekaser, 2004).
Cyclical deficits are those that occur when the economy weakens and tax revenues fall. This results in a shortfall of revenues compared to spending at the government level, and hence to deficits. Reducing government spending at this point would weaken the economy further and make the situation worse, so the deficit arises. The situation is short-term, and when the economy recovers, the deficit is erased.
Structural deficits, on the other hand, do not arise because of a temporary downturn in the economy, but rather are the result of the government making a conscious decision to spend more money than it takes in. A cyclical deficit occurs when the economy is performing at less than its maximum level; a structural deficit occurs when the economy is operating at its maximum level, but revenues still do not keep pace with expenditures. Without drastically reducing expenditures or increasing revenues, the deficit will continue.
If the government were financing capital expenditures with borrowed funds, it is possible that economists could support deficit financing, according to Dekaser. However, the government now uses deficit financing to support its debt, and pay for retirement and health care. This does not provide economic stimulus, and the deficit, in turn, drives up interest rates as deficit financing now competes with other types of investments for domestic and international borrowers.
The author's distinction between cyclical and structural deficits is interesting, and makes sense on the surface. When deficit financing is used to stimulate the economy and lead to increased revenues that will eventually offset the deficit, one could argue that the ...