The latest news from the Congressional Budget Office (CBO) is that while government spending is up, government revenues (by 9 percent) are up and taxes are up, the deficit is down. In fact, it is down to levels not seen since George Bush left office (2007-2008). So now Barack Obama can say that his performance on the deficit is no worse than George Bush’s. You know, those deficits that he described as “irresponsible” and “unpatriotic.”

But in fact the problem is not, and hasn’t been the deficit. It’s the spending. From an economics perspective we are actually worse off with higher spending and a lower deficit than we would be with lower spending and a higher deficits. In order to accomplish a smaller deficit the President and Congress have increase tax rates on productive activity–capital gains taxes, dividends taxes, and top marginal income tax rates. The fact that this may have led to smaller deficits is not something to cheer about. All of these taxes discourage work effort, investment, and entrepreneurship. And the higher spending that the new revenues have given rise to does nothing but subtract from private sector activity. It does not add to it, as many Keynesian economists would have you believe.

It makes very little difference whether a given amount of spending is financed by borrowing or taxing. A dollar of government spending preempts a dollar of private sector spending or investment, regardless of how the government gets that dollar. Hoopla about the deficit going down is misplaced. The only real way fiscal policy can be used to help the economy is by cutting taxes on productive activity and cutting spending.