Cyclical Deficits in The U.s.a

The expansion and contraction of the macro economy is affected (sensitivity) by the amount of the Federal Deficit.  The expansion triggers tax revenues to decline as unemployment rates increases while contraction is activated when people turn to government for additional income support.  The offset in added expenditure is due to inflation-swollen tax receipts.

The impact of cyclical forces are:

• The cyclical deficit widens when unemployment increases or inflation decreases.  Such changes in unemployment occur when:

          1. Government spending automatically increases for: Medicaid, Social Security benefits, Welfare benefits, Food Stamps, Unemployment Insurance benefits; and

          2.  Government tax revenues decline reluctantly for:  Social Security Payroll Taxes, Corporate Income Taxes, Individual Income Taxes.

• The cyclical deficit shrinks when unemployment decreases or inflation increases.  Such changes in inflation occur when:

          1.  When the inflation rate increases : Government spending increases for: Higher interest payments; Indexed Retirement and Social Security Benefits.

          2.   Government tax revenues increases for:  Social Security Payroll Taxes; and Corporate Income Taxes.

Note that portion of the budget deficit attributable to unemployment or inflation is the cyclical deficit.  Thus, actual budget deficits and surpluses may arise from economic (unpredictable) forecast conditions as well as policy.  These are true within three (3) US Presidents – namely: President Reagan (soaring deficit); President Bush (unemployment rate rise) and President Clinton (annual budget deficit shrank).  Todays economic condition is no secret to the world facing the Obama Presidency.