Man Without Qualities

Wednesday, July 28, 2004

The Deficit

The White House is now predicting a budget deficit of about $420 Billion, about $100 Billion less than had previousy been predicted by the White House. The new estimate is a record in numerical dollar terms but - at about 3.5% of GDP - quite a bit lower than the circa-6% deficits of the mid-1980's.

Since it's an election year, the size of the deficit is naturally the topic of political discussion. That's especially true in respect of conditions prevalant during the second Clinton administration, when the government ran a "surplus."

But it is common knowledge that the "surplus" run by the federal government in the late Clintonian  era depended heavily on tax revenue - largely capital gains tax revenue - realized from the "internet bubble." It is now widely believed that much (but by no means all) of such tax revenue did not correspond to actual wealth creation, since the "internet bubble" is widely viewed as just that - a "bubble." While this effect runs deeply into the federal figures, its most spectacular consequence was undoubtedly reflected in the California state budget, which swung hugely into deficit as a result of increased spending justified on the basis of such ephemeral revenues - increased spending that could not be funded after those revenues evaporated.

So it's an interesting political thought experiment to ask: What would the federal deficit be today if the late Clintonian tech boom were still going on - even given the Bush tax cuts?

I haven't seen these particular calculations and comparisions carried out since the new deficit estimates were announced. But they would be interesting from a political perspective. My guess is that with the added Clintonian revenues, the federal deficit might now be less than $200 Billion - or less than 2% of GDP.

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