Cyclical Deficits

This does not provide economic stimulus, and the deficit, in turn, drives up interest rates as deficit financing now competes with other types of investments for domestic and international borrowers.

The author's distinction between cyclical and structural deficits is interesting, and makes sense on the surface. When deficit financing is used to stimulate the economy and lead to increased revenues that will eventually offset the deficit, one could argue that the deficit is "good".

But the distinction between structural and cyclical deficits might be artificial and arbitrary. The war in Iraq is costing the government billions of dollars, and the government is currently running a deficit. War does not yield a capital investment, but it certainly serves other purposes. In addition, war can be a strong economic stimulus through the awarding of government contracts; these contracts lead to increased employment and increased revenues on both a business and personal level. According to Dekaser, the war might well be classified as structural rather than cyclical, however.

It is also not clear that politicians enter into deficit spending solely to serve political gains. Trickle-down economics from the Reagan era helped the economy improve, but also led to large deficits. This would have been considered a cyclical deficit by the author, but it is not clear that it was not a structural deficit.

 

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