Public Policy

Budget deficit trimmed: trend or statistical anomaly

Many outlets in the popular press have been heralding the reduction of the budget deficit as a sign of good times on the horizon for the U.S. economy.  The Washington Times (“Economic sunshine“) credits President Bush’s economic policies–in particular his tax cut–as the source for the economic growth which is driving the increased tax receipts.  Former Secretary of Labor Robert Reich (“President’s Economy on Parade“) is quick to point out that there is still a $280 to $300 billion deficit.  Reich says the current administration tax revenues are “still running $100 billion less than what the White House projected five years ago when it sold its tax cuts.”

Economist Jim Hamilton is less impressed with either argument (“Is the surge in tax receipts truly extraordinary?“).  In his blog, he believe that supply-side economics did not cause the surge in tax collections and that it is unlikely that there is a trend towards greatly increasing tax receipts (as a percentage of GDP) in the foreseeable future.  Using a GARCH model, Hamilton believes that the 2006 first quarter results are simply a statistical anomaly.