Thursday, November 11, 2010

Irrefutable sign of recovery: federal receipts up


Since its low-water mark last January, the rolling 12-month total of federal government revenues has been rising at an annualized rate of 10%. In the past six months, the rolling 12-month total of federal government receipts has risen at a 12.5% annual pace. This has nothing to do with tax rates, since they haven't changed at all. It is entirely attributable to rising incomes and profits, and those in turn provide irrefutable evidence that the economy is improving. In a similar vein, Mark Perry in a series of posts has noted the long and growing list of states that are registering strong growth in receipts, the latest of which is here.

Just as declining revenues are a hallmark of recessions, rising receipts are a hallmark of recoveries.

I note with great relief that the 12-month rolling total of federal spending has been flat since June '09. The narrowing gap between spending (flat) and revenues (rising) has brought the 12-month federal deficit down from a peak of $1.48 trillion last February, to $1.26 trillion in October. In terms of GDP, the deficit has declined from a high of 10.3% last December, to approximately 8.5% in October. This is welcome progress, of course, but to bring the deficit down to a more reasonable level (say, 3-4% of GDP) in coming years we need to avoid the huge spending ramp-up that will occur if ObamaCare is fully implemented and entitlement programs are not trimmed.

I am encouraged that the Republican victory in last week's elections came with a clear mandate to curb the growth of government and keep taxes from rising. The political winds have shifted to a degree that should find at least a majority of Senators, and perhaps 60 or more, who are willing to extend the Bush tax cuts for all taxpayers for at least the next two years. Already the Republicans' coming control of the House should be enough to put a break on the growth of spending, which could result in at least an important de-funding of the spending necessary to implement ObamaCare.

The early recommendations of the Bowles-Simpson deficit commission, released yesterday, are highly encouraging. If at least some of the ideas gain currency, we could see significant and very positive reforms. Eliminating deductions in order to get lower and flatter tax rates for individuals and corporations is a very positive change. Reining in the growth of entitlements, defense, and discretionary spending is essential, and it is a key part of the Republicans' mandate and key objectives. Those reforms would almost certainly boost the prospects for future growth, and reinforce the healthier trends in spending and revenues that we have seen so far this year. There is plenty of light at the end of the deficit tunnel, and continued recovery seems all but assured.

9 comments:

Bill said...

Scott,

What do you think of ending the mortgage deduction? Will it kill the housing industry or do you think it would help the economy overall if it leads to a flat tax?

Scott Grannis said...

Ending the mortgage deduction is the right thing to do economically speaking, but probably very difficult from a political point of view. Bowles and Simpson are suggesting lowering the cap on deductible mortgages to $500K, which might be a workable compromise since that would allow most of the middle class to keep their cherished deduction.

Reducing or eliminating the mortgage deduction would probably hurt the housing market on the margin, but if we are ever going to do this, now is the time, since lower home prices and very low mortgage rates have made homes more affordable than at any time in generations.

Limiting or eliminating the mortgage deduction would remove an important source of distortion in the housing market, and combining this with lower and flatter tax rates would be a huge incentive to work and invest. All told, it would be a really good thing for the economy, and the advantages would likely far outweigh the disadvantages.

Bill said...

Scott,

Do you think the sovereign debt issues are going to set off another market decline like they did in May? It seems every time the market gets into the 11,300-400 territory it drops back.

Scott Grannis said...

The sovereign debt issues may be a good excuse for a selloff, but in the end I think they are great. What better way to focus the world's attention on one of the biggest economic problems we have--the unchecked growth of government almost everywhere? Cut the size of government and you free up tons of resources that can be better utilized by the private sector. It's like taking a ball and chain off of the legs of the economy.

Benjamin said...

I agree with this post in all regards.

However, I would like to see some recognition somewhere that we face a serious obstacle, in the reality that all rural states and zip codes are huge beneficiaries of federal lard.

A state like Kentucky gets back $1.50 for every $1 they send to DC, and that amounts to about $4,000 net per capita (!).

Let's see what Ryan Paul does when he gets to DC--he is already backsliding on earmarks.

To me, with so many rural senators, we face a real uphill battle in balancing the federal budget, along with hoariest of sacred cows, the defense-VA-foreign policy archipelago, now a $1 trillion a year money eater.

You know, sometimes it is pointed out that the war on poverty eats money and never ends poverty. I agree.

The war on drugs and the war on terrorism also eat even more money, and never are we told they are won either.

Like they say, end war.

brodero said...

Not related but...

yesterday California"s 52 week moving average of nonseasonally adjusted jobless claims finally broke through the 74,000 level.
This average has moved between the
75,000 to 74,200 level for well over a year....If California is starting to join the party we could
start to see some very encouraging jobless numbers in the future....

Paul said...

"Let's see what Ryan Paul does when he gets to DC--he is already backsliding on earmarks."

Do you mean Rand Paul, son of your idol and porker Ron Paul?

Richard O'Neill said...

The Canadians, those with the solvent banks,nearly confiscatory taxes, and a social welfare state to beat any, do not allow for mortgage interest deduction , yet are second homes are rather common. Go figure...

Scott Grannis said...

The Canadians have been doing some pretty impressive things of late. Notably, the don't coddle their banking system, and as you note, and they don't try to subsidize homeownership. They have also been cutting taxes on the margin.