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

600
500
400
300
Federal deficit
BILLIONS ($)
200
100
0
–100
–200
–300
1980 1984
Figure 38.1
THE U.S. FEDERAL
BUDGET DEFICIT
1988 1992 1996 2000 2004
During the 1980s, the federal government ran large deficits. These were reduced and
eventually eliminated by the end of the 1990s. The budget stance shifted back to
deficits after 2001.
SOURCE: Economic Report of the President (2005).
Market Committee (FOMC) have supported it. This issue gives us a third question:
Should the Fed target inflation?
Do Deficits Matter?
The budget of the U.S. federal government deteriorated rapidly between 2000 and
2004. In 2000, the federal budget had a $236 billion surplus; by 2004, the deficit was
$520 billion, equal to about 4.5 percent of GDP. Figure 38.1 shows the big swings
in the federal budget picture over the past twenty-five years. By the end of the 1990s,
the United States appeared to have solved its budget problems after the large
deficits that began in the 1980s. Through a blend of tax increases and restrictions
on spending growth, the deficit had been eliminated and replaced by a surplus. And
looking into the future, the Congressional Budget Office produced budget projections
showing huge surpluses for the first decade of the twenty-first century.
Beginning in 2001, several events combined to push the budget back into deficit.
First, the economic recession that began in 2001 reduced incomes and thereby
reduced the government’s tax receipts, since most tax revenues are linked to income
and spending. This cyclical factor was only temporary, however. By 2002, the economy
was growing again; by 2004, the lingering effects of the recession on tax revenues
were gone. But other factors continue to have an impact. Fulfilling campaign promises
made before the 2000 election, President George W. Bush succeeded in shepherd-
838 ∂ CHAPTER 38 CONTROVERSIES IN MACROECONOMIC POLICY