Deficit large enough to turn the economy?

[Skip to the end]

Given our counter cyclical tax structure, a weak economy causes the deficit to rise until it adds sufficient income and net financial assets to turn things around.

It then goes the other way, with the strong economy driving up revenues faster than even the government can spend, until the falling deficit ends the cycle.

In the past, when the deficit got in the range of 5% of GDP that proved sufficient to cause the turn.

It might be higher this time around.

The surplus years did a lot of damage as they removed substantial net financial assets that only deficits can replace.

The proactive Bush fiscal package reversed the economy earlier than otherwise.

Also, government purchases of financial assets don’t ‘count’ for purposes of this analysis.

So ex TARP, the deficit is maybe 2% or more smaller than the headline deficit number.