As a follow up to my (admittedly simplistic) post yesterday optimal tax collections, I noticed that there is one interesting bit of information in the spreadsheet, still untouched, that would make a nice post by itself.
So how does growth (in real GDP per capita) look for deficits of different size? Letting A equal deficits > 4% of GDP, B equal deficits between 2% and 4% of GDP, C equal deficits between 2% and 0% of GDP, and D be surpluses, and using data going back to 1950:
t to t+1___2.81%___1.89%___2.81%___0.46%
t to t+2___2.75%___1.98%___2.34%___1.18%
t to t+3___2.49%___1.91%___2.34%___1.46%
t to t+4___2.17%___1.96%___2.26%___1.77%
t to t+5___2.11%___2.00%___2.28%___1.74%
t to t+6___1.86%___2.12%___2.20%___1.84%
t to t+7___1.89%___2.11%___2.20%___1.90%
t to t+8___1.92%___2.13%___2.11%___2.28%
As an example of how to read the table, the annualized growth rate, over a seven year period beginning in a year when deficits lie between 0 and 2% of GDP is 2.20%.
What does this show? Well, over the short run, say, one to three years, the largest growth rates are associated with a large deficit. Two explanations I see for this:
1. The responsible reason: Governments are Keynesian, spending a lot when times are bad, and cut back on spending when times are good (to pay off the debt raised when times are good)
2. The irresponsible reason: In the short term, a deficit is free money. After a few years, though, it has to be paid back. The larger the deficit, the more principal and interest have to be paid back.
I would think option 1 can be dismissed out of hand by anyone with the self-awareness of a stick of gum. Few administrations have made much of an effort to pay off debt when times are good.
Over the longer haul (8 years), it seems that running a small deficit or perhaps even a surplus (see year 8!) is correlated with the highest growth. I would imagine this is especially true if growth can exceed the deficit, and interest rates are low.
Note that because tax and deficit data is for fiscal year, I used real GDP per capita for the third quarter of the calendar year.
As always, if you want my spreadsheet, drop me a line.