People freak out over government deficits.
Deficits are a flow variable. They are measured over a period of time, and can be roughly proportional to the length of that period of time.
But deficits also have up and downs. There’s a problem that’s been known in time series analysis for a long time, called aliasing. Aliasing is where you average or sum a time series over two or more observations … and the resulting time series doesn’t look like what you started with.
This is a huge problem with deficits. Deficits are supposed to be bad: they wear black hats. Surpluses are supposed to be good: they wear white hat. ;)
The thing is, if you look at deficits month by month, sometimes they’re in deficit and sometimes they’re in surplus. That should mean the economy is being pushing in the wrong and then the right direction.
But no one talks about that.
Instead, what we do is we add up those numbers of one sign (the deficits) and those numbers of the opposite sign (surpluses) until we get a number of the sign we like. Usually that shows a deficit … because deficits are bad … they wear black hats. Boo-wha-ha-ha.
This little bit of statistical sleight-of-hand should make you think twice about taking deficits seriously. I sure hope so.
Anyway, this was all motivated by the biggest monthly surplus in 7 years that occurred in the spring. If surpluses are good, that should have caused the biggest boost to the economy in 7 years. I’m still waiting.
Read about it in the article entitled “U.S. Posts Biggest Monthly Budget Surplus in Seven Years” in the May 12 issue of The Wall Street Journal.