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Deficits do not paint a complete picture of our current economic slump


With the current continuing resolution for government funding set to expire next week, Congress will once again spar over proposed budget cuts as Republicans attempt to confront our enormous Federal budget deficit.  Earlier this week, economics blogger Keith Hennessey published a timely reminder of an even more fundamental problem: Deficits Are an Important But Incomplete Metric.

You should read all of Hennessey's post, but here is the heart of his argument.  For decades, US government spending has averaged approximately 20% of our annual GDP; sometimes a little more, sometimes a little less, but over time the average has stayed right around 20%.  Revenue receipts averaged around 18% of annual GDP, leaving an average annual deficit of around 2% of GDP.  During recessions, the percentage of spending and the size of the deficit trends upward; during prosperous times, the trend is slightly downward (the "balanced budget" years of 1998 - 2001 saw average government spending drop to around 18.5% of GDP). 

chart.jpg


But starting in FY 2009, something drastic happened.  Government spending rocketed to 25% of GDP.  At the same time, owing to the severity of the recession, receipts were at an all-time low and the resulting deficit ballooned to 10% of GDP.  FY 2010 was a slight improvement, but projections for 2011 are once again in the 25 / 10 range. 

This represents a startling growth in the size of the Federal government in relation to the size of our economy -- a 25% increase in the size of government, and a five-fold increase in the size of the annual deficit.

This is the difference that really matters.  Even if we succeed in balancing the budget, we are still looking at a drastic increase in the amount of money the Federal government pulls out of our economy, which is now 1 out of every 4 dollars, compared to the historic average of 1 out of every 5 dollars.

When the government takes a bigger share of our wealth, less is left behind for us.  I believe that this inconvenient truth, plus our current unsustainable debt levels (and the resultant uncertainty over interest rates) combined with the unprecedented increases in banking, finance, health care, and environmental regulations promulgated by the Obama administration, provides the most reasonable explanation for why our economy is still in the proverbial toilet.

Apparently the Democrats have no problem with this, nor do they have any interest in discussing it with the American people.

(If you'd like to do some data crunching yourself, the full set of spreadsheets from the Office of Management and Budget is available here.) 
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Comments (9)

Yo hippie manYou say... (Below threshold)
BlueNight:

Yo hippie man
You say you fight for me
My working class job
My right to a fair wage

But your hippie friends
Took my boss man's money
And he fired me
You suck

(I know it doesn't rhyme. It doesn't have to. It's art.)

RE: "When the government ta... (Below threshold)
kevino:

RE: "When the government takes a bigger share of our wealth, less is left behind for us."

But that isn't the key problem. When we take more money out of the private sector and put it into the public sector, we are pulling money out of the most efficient part of the economy and putting it into the least efficient part of the economy. We are taking capital out of the part of the economy that develops real wealth and putting it into the country's overhead.

The outlays as % of GDP in ... (Below threshold)
WayneM:

The outlays as % of GDP in this chart decline in the last few years due to projections of GDP growth above 5%. Considering the current, and apparently continuing, state of the economy, growth projections of that magnitude seem quite unrealistic. High deficits and high taxes sucking capital out of the productive economy, restrictive regulations limiting growth prospects, and uncertainty in the investing community regarding what lurks next in the hearts of our rulers do not augur well for growth above the 2-3% range that we have ben seeing since the end of the recession.

As Pelosi likes to say "We'... (Below threshold)
GarandFan:

As Pelosi likes to say "We're going to spend our way to prosperity".

A suggestion for those that... (Below threshold)
feeblemind:

A suggestion for those that have a computer Monopoly game. There are optional rules you can use, so try this:

1) Change the income tax from 10%/$200 to 15%/$400

2) Change the Luxury tax from $75 to $300

3) Change the jail time from three rolls of the dice to one roll and up the fine from $50 to $200.

4) Jack up the mortgage interest to the max. I think it is 20%

5) Reduce the salary at "go' to $100.

Now play the game and watch what happens.

Though an over simplification, it starkly illustrates what happens when the Government pulls too much money from the economy.

When the governmen... (Below threshold)
When the government takes a bigger share of our wealth, less is left behind for us.

This view of economics ignores the fact that government funds, *properly* invested, can result in an increase in the economy and MORE being left behind for everyone.

For examples of this, see the interstate road system; the mail system; the many technological breakthroughs that accompanied NASA; school loans and Pell grants; and the Internet itself, which began as a government-funded research project.

Generation Y and the Millen... (Below threshold)
Caesar Augustus:

Generation Y and the Millennials are going to bear the brunt of this incipient fiscal disaster, which of course has been foisted upon us largely by left-wing Democrats. But as a result of rank leftism in the school systems the youth of today literally are too stupid to do anything about their impending financial doom. That must be the definition of irony...

Generation Y and t... (Below threshold)
Generation Y and the Millennials are going to bear the brunt of this incipient fiscal disaster, which of course has been foisted upon us largely by left-wing Democrats.

Because of course the Bush administration, who created the large and continuing hole in our budget with unneeded tax cuts for the wealthy and an unnecessary war of choice in Iraq...with the backing of the GOP Senate and House...were all left-wing Democrats.

Sigh.

RE: "Because of course the ... (Below threshold)
kevino:

RE: "Because of course the Bush administration, who created the large and continuing hole in our budget with unneeded tax cuts for the wealthy and an unnecessary war of choice in Iraq...with the backing of the GOP Senate and House...were all left-wing Democrats."

President Bush tried to keep the economy going through tax cuts, and that policy was eventually endorsed by Democrats. And, of course, you have no data to show that revenue went down during the previous tax cuts, so saying that tax cuts add to deficits is a non-starter.

From the Heritage Foundation:
1.President Bush expanded the federal budget by a historic $700 billion through 2008. President Obama would add another $1 trillion.
2. President Bush began a string of expensive finan­cial bailouts. President Obama is accelerating that course.
3. President Bush created a Medicare drug entitle­ment that will cost an estimated $800 billion in its first decade. President Obama has proposed a $634 billion down payment on a new govern­ment health care fund.
4. President Bush increased federal education spending 58 percent faster than inflation. Presi­dent Obama would double it.
5. President Bush became the first President to spend 3 percent of GDP on federal antipoverty programs. President Obama has already in­creased this spending by 20 percent.
6. President Bush tilted the income tax burden more toward upper-income taxpayers. President Obama would continue that trend.
7. President Bush presided over a $2.5 trillion increase in the public debt through 2008. Setting aside 2009 (for which Presidents Bush and Obama share responsibility for an additional $2.6 trillion in public debt), President Obama’s budget would add $4.9 trillion in public debt from the beginning of 2010 through 2016.

Bush's worse year - by far - was 2009, but the fiscal policies were not under his control because the Democrats took control of the House and Senate.

Bottom line: Bush spent money like a drunken sailor. The Democrats spent money like a ship-load of drunken sailors. The Republicans have learned their lesson and may be trying to correct the problem. The Democrats have learned nothing and are trying to push us further over the cliff.




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