Not All Deficits Are Created Equal

John A. Tatom is a great write that explains about deficits and its effects on economics in his article, ‘Not All Deficits Are Created Equal’. There are several issues and some are critical such as he tells that ballooning federal deficit may harm the U.S. economy. Tatom analyses that the budget deficits are lower than national savings rate while its major reason is increasing high interest rates. This analysis have two faults, first is raising high deficit interest rates and second is source of deficit influence on economy. There is a conflict on the relationship between budget deficits and interest rates because some evidence shows its negative relationship, some shows that it does not raises interest rates while some evidences show its positive relation during statistical tests. When Totam shows the data about Federal Debt, no doubt the evidence specifies the budget deficits and effects on interest rates. He shows that effects of cyclic deficits on weak economy while cyclic expansion begins to raise up interest rates while budget deficits shrink. After the involvement of CBO (Congressional Budget Office) one more different situation occur because after the measurement of CBO forecast there is no relation to budget deficits while positive interest rates. According to figure2, it indicates to a strong negative relationship while figure3 disclose mixed relationship between budget deficits and current account deficits however future deficits depends on budget deficits which shows future deficits forecast and the real interest rates. Totam considers that deficits are not all the same. He explains a very important fact of cyclical deficits that become the reason of tax reduction with the help of budget deficits. Undoubtedly, the evaluation of the efficiency of tax incentives does not depend on their effects only because they boost investment and raise productivity, where tax cut is tied to spending and spending is likely to increase. According to the principle,