Economics Question

[potokar201]

Im struggling to understand the macroeconomic concept involving business cycle and I need to know. How does the deficit change in each segment of the business cycle and how does it do so?

Thank you
Potokar201

 

[Mr. H.]

Is that you, Tony?

 

[expat_panama]

...How does the deficit change in each segment of the business cycle...

Sounds like a great essay question for 1st sem. Macro final, although my bet is that getting a decent grade would largely depend on knowing the prof's political views.

The thing is that the deficit says how much more into debt the gov't's going this year. It wouldn't matter if we weren't in a lot of debt already, and that wouldn't matter except for the fact that the economy is slow so there's hardly any revenue, and that wouldn't matter except there are a lot of crazy people who want to try and get more revenue by raising tax-rates. Raising rates would kill any recovery there is which would lower revenue more.

That's the reasoning that's easiest to back with econ data, but a lot of leftists would disagree.

 

[likeabird03]

I would say that the deficit is at it's highest level at the early stages of a business cycle (that being after a recession and in the early stages of recovery), much like how it's at it's highest level right now. I think right now we're experiencing some very special circumstances, but you get the picture.

The reason for this is that a contracting economy causes tax receipts to decline somewhat, and because the govt is so slow at adjusting it's size and expenditures to the decrease in income, it continues to hire, spend, and act like everything is merry well into the recession. This goes on for about a year or so until the deficit gets bigger and bigger and they finally have to make adjustments. It's often not until the private sector has bottomed out that the govt finally comes to this realization and cuts spending. The thing is, because it continues to increase spending while revenues were declining, and continued to do so for a while, it often has to over-correct itself and cut spending and public jobs more than it otherwise would have if they spent within their means in the first place.

My point is that the govt and the deficit tends to lag the economic business cycle very significantly, up to two years even. They finally don't make any cuts until the new business cycle is well underway, and this often has a blunting effect on the economic recovery itself. It's often not until the business cycle reaches it's maturity stage that deficits start getting balanced out.

 

[expat_panama]

...the deficit is at it's highest level at the early stages of a business cycle...

--or it would be if past deficits hadn't piled up the debt so high. Right now debt's way out of line for any stage of any business cycle, but about right for after a struggle for survival nuking an enemy that tried to enslave us, like 1950. It's easier to see with a fed graph dividing federal public debt divided by gdp: