Running on automatic: although politicians take credit for reducing the federal deficit, naturally occurring economic conditions are responsible - includes related article on population statistics

American Demographics, Nov, 1997 by Elia Kacapyr

Although politicians take credit for reducing the federal deficit, naturally occurring economic conditions are responsible.

If you remember the Apollo 11 mission to the moon or John Wayne receiving an Academy Award for True Grit, then you may remember the last time the federal government ran a surplus-1969. Today's politicians suggest that the nearly 30 years since then of excess spending, or insufficient taxation, have been an aberration. With foresight and political acumen, they have been able to bring the federal budget to the brink of balance.

The true force behind the much improved federal financial outlook, however, is the economy (for which politicians may also like to take credit). With annual growth rates ranging between 2.0 and 3.5 percent since 1992, Wall Street has begun referring to it as the "Goldilocks" economy: not too fast to result in inflation, not too slow to bog down into a recession, but "just right." The point is that this steady growth has been going on for more than five years. When the economy makes gains over a stretch of time, the federal deficit shrinks.

The explanation is simple: a surging economy means more income for households and higher profits for firms. When people are doing better, they have less need for income-maintenance programs as a matter of course. At the same time, tax revenues increase when businesses and individuals are making more money. With tax collections up and government spending dampened, the federal deficit naturally contracts.

Sound fiscal policy dictates that the growth of government expenditures should be reduced, or taxes should be raised, to prevent a booming economy from erupting into runaway inflation. Here we see it happening automatically. Political foresight or interference is unnecessary.

These automatic stabilizers also work to raise the federal deficit when the economy becomes sluggish. As a recession approaches, more people qualify for unemployment insurance benefits and food stamps. Spending on these programs soars. At the same time, less tax revenue is collected because income and spending are down. The government deficit widens. Nevertheless, increased deficit spending is exactly what some economists prescribe to fight a recession.

The lesson is clear: it's economics, not politics, that determines the fiscal condition of the government. This is something politicians will be at great pains to point out when economic growth slows and the federal deficit once again widens.

The relationship between the federal budget and the economy extends to our Index of Well-Being. When the Well-Being Index attained record lows in the early 1990s, the federal deficit shot up by 20, 30, and even 40 percent a year. In more recent years, as our measure of well-being has advanced steadily, the deficit has decreased by double-digit percentages.

For June 1997, the American Demographics Index of Well-Being virtually held steady at 102.13. A significant drop in the productivity and technology component nullified gains in the other four components. Especially noteworthy is the improvement in the social and physical environment brought about by a continued dip in the divorce rate.

Those who follow these numbers from month to month may notice revisions in the income and employment component, as well as the leisure component. These revisions are the result of the Bureau of Economic Analysis reworking its series on income and expenditures back to 1993. Currently, the Well-Being Index reads 102.13, indicating that the typical American is 2.13 percent better off than in April 1990, the base month for the index.