Wednesday , September 19 2018
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Let’s Talk About that “Rapidly” Falling Deficit

Summary:
Here’s an interview of Larry Kudlow, National Economic Council Director, saying that the deficit is “coming down rapidly”. I don’t know why he’s saying this because it’s not remotely true and there’s no reason for him to shy away from the rising deficit. The US Treasury’s Monthly Treasury Statement clearly shows the deficit is rising. The deficit is UP 12% this year versus the same period last year. Here it is in black and white: Now, the really interesting thing is why this is happening. A lot of people pin this on the tax cut and especially corporate taxes. But corporate taxes are a pretty small part of overall receipts (just 6%). And total tax receipts are actually UP so far in this fiscal year. The reason the deficit is rising is because the Federal Government is spending more.

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Here’s an interview of Larry Kudlow, National Economic Council Director, saying that the deficit is “coming down rapidly”. I don’t know why he’s saying this because it’s not remotely true and there’s no reason for him to shy away from the rising deficit. The US Treasury’s Monthly Treasury Statement clearly shows the deficit is rising. The deficit is UP 12% this year versus the same period last year. Here it is in black and white:

Let’s Talk About that “Rapidly” Falling Deficit

Now, the really interesting thing is why this is happening. A lot of people pin this on the tax cut and especially corporate taxes. But corporate taxes are a pretty small part of overall receipts (just 6%). And total tax receipts are actually UP so far in this fiscal year. The reason the deficit is rising is because the Federal Government is spending more. Total outlays are up 5.2% this year while tax receipts are up just 4%. So the rising deficit is so far attributable to rising government spending.

But here’s the stranger thing – I don’t know why Kudlow is misleading us all about this. He should be applauding the larger deficit. Sure, Republicans spent 10 years telling us all that the deficit would bankrupt the USA, but the reality is that the economy remains somewhat fragile and inflation, the true measure of the deficit’s dangers, remains historically low. And with the Federal Reserve tightening and nearly inverting the yield curve the deficit is likely offsetting much of that contractionary impact from Fed policy. So I think the deficit is right about where it should be.

Regular readers know that the “USA is bankrupt” narrative is empty politics based on horribly wrong understandings of how the US monetary system works. So I don’t see what Kudlow is running away from. He should be out there saying that the USA can afford the deficit and that it’s perfectly fine to be running a moderate deficit at this point in the business cycle when things are still weak and potentially getting weaker because of Fed policy. I know that maybe that doesn’t fit the Trump narrative quite as well as “we’re fiscally responsible and we’re cutting spending” (they’re absolutely doing neither), but saying we can afford the deficit and that it’s appropriate for where we are in the business cycle is the right stance.

Don’t be scared Larry, just tell it like is – you guys are boosting spending, boosting the deficit and the USA can afford it!

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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