Friday, September 12, 2008

Federal finances are not in terrible shape

The federal deficit is rising, but relative to the size of the economy it is far from being a significant problem. Most people are blaming runaway spending for the deficit, but that's not actually the case. The rebates this summer did help to widen the deficit, and spending growth in recent years has somewhat outpaced growth in the economy, but it's not earth-shattering. As these charts make clear, the biggest reason the deficit has gone up this year is a decline in revenues. That in turn owes much to the slowdown in the economy and the losses related to subprime securities. It's not unusual at all for revenues to slump when the economy slumps. What is unusual, and very much counter-consensus, is that spending relative to the economy has not surged. Note the surge in spending as a % of GDP that occurred prior to other recessions. George W. Bush is getting a bit of a bad rap on this.

1 comment:

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