[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

7
6
5
Actual deficit
POTENTIAL GDP (%)
4
3
2
1
0
Full-employment
deficit
–1
–2
Actual minus
full employment
–3
1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
Figure 33.3
ACTUAL AND
FULL-EMPLOYMENT DEFICITS
The government’s deficit fluctuates with movements in GDP. The full-employment
deficit provides an estimate of what the deficit would be if the economy were at
full employment—that is, with the cyclical component of the deficit removed.
The figure shows the difference between the actual and full-employment deficits
(blue line). When cyclical unemployment is positive, the actual deficit exceeds the
full-employment deficit.
SOURCE: Congressional Budget Office.
One way to separate out the effects of automatic stabilizers from these active
changes in policy is to focus on the full-employment deficit—what the deficit
would have been had the economy been operating at full employment. The fullemployment
deficit adjusts for the stage of the business cycle; it adjusts for the
changes in taxes and spending that vary over the business cycles. For instance, in
a recession when incomes fall, the actual deficit increases because tax revenues
decline with the drop in income. The full-employment deficit corrects for this
cyclical effect on taxes by calculating what the deficit would be if the economy
had not gone into a recession. It changes, therefore, only when there are discretionary
changes in taxes or spending and gives a better measure of the impact of
discretionary fiscal policy actions.
If the economy booms and tax revenues swell, the full-employment deficit will
be greater than the actual deficit; if the economy goes into a recession and tax
revenues fall, the full-employment deficit will be less than the actual deficit. Most
economists view the government as fiscally responsible so long as there is no deficit
when the economy is at full employment—that is, the full-employment deficit should
be zero. Balancing the budget at full employment would allow automatic stabilizers
to work during business cycle fluctuations. Figure 33.3 shows the actual U.S. federal
deficit and an estimate of the full-employment deficit. In 2003 (the last year
shown), cyclical unemployment was almost zero, so the full-employment deficit and
the actual deficit were equal.
FISCAL POLICY ∂ 735