The Miracle Deficit Cure? Growth.

So far this fiscal year, the federal government is $1 trillion in the red. Why this is good news.

By Daniel Gross
Posted Tuesday, July 13, 2010, at 5:35 PM ET

---

On Tuesday, the Treasury reported the federal government's receipts and expenses for June. The upshot: Through the first nine months of fiscal 2010 (which started last fall), the federal government has run a $1 trillion deficit.

Deficits hawks will doubtless highlight these numbers as yet another reason why the National Debt Commission must move swiftly to cut social insurance and impose new regressive taxes. I take the opposite view. The fiscal 2010 deficit—$1 trillion and counting—is an encouraging sign.

Let me explain. Federal tax revenues are highly leveraged to economic growth and to the performance of markets, corporations, and rich people. This means they can be volatile. When markets and profits boom, capital gains taxes, payroll and income taxes, and corporate income taxes flow like a mighty stream. As a result, it's not uncommon for tax receipts to rise 6 percent or 7 percent in a year when the economy grows by 3 percent. This volatility works to the downside, too. When the economy contracts and markets crash, capital gains and corporate income tax revenues dry up. For example, corporate income taxes (click here and scroll down to Page 30) fell from $370 billion in fiscal 2007 to $304 billion in fiscal 2008 (down 18 percent), and then plunged to $138 billion in fiscal 2009 (down 55 percent). In fiscal 2009, a period in which the economy shrunk about 2.6 percent, government receipts plummeted 16 percent, from $2.5 trillion to $2.1 trillion. To aggravate matters, some government spending is countercyclical. That means that in good times, when tax receipts are high, less money is spent on stimulus and social welfare benefits. In bad times, when tax receipts are ebbing, more money goes out the door. And that's why surpluses and deficits can materialize out of nowhere.