Tuesday, June 12, 2012

Federal budget update

Federal spending and revenues continue to follow a semi-virtuous path: revenues are inching higher, thanks to a modestly-growing economy, more people working, and slightly higher incomes; and spending growth remains very low, thanks to fewer people receiving unemployment benefits, and a Congress that has been gridlocked for most of the past three years.


As the chart above shows, revenues have risen from $2 trillion in 2009 to $2.4 trillion over the past 12 months, while spending has increased by only $0.1 trillion from 2009 to the past 12 months. As my good friends Art Laffer and Steve Moore note in their op-ed in today's WSJ, this supports Obama's claim to have overseen an extended period of very slow growth in federal spending. But it is ironic that Obama should take pride in the slow growth of spending under his administration when he continues to be among the most vociferous proponents of increasing government spending. They argue, and I would agree, that if Obama were to pursue policies that reduce spending further, without raising taxes, the economy would be much stronger going forward.




The first of the above three charts shows spending as a percent of GDP. One of the best things to happen as a result of relatively flat spending over the past few years is that the size of government has shrunk by two percentage points of GDP. This is a step in the right direction, since as Moore and Laffer remind us, and as Milton Friedman argued long ago, "government spending is taxation ... government can't tax an economy into prosperity. Friedman made it clear time and again that restraining government spending stimulates the economy by liberating private resources." Excessive spending can be financed by selling debt, but ultimately it must be paid for by higher taxes. So it's not so much the size of the deficit that is important, but the magnitude of spending, especially as a percent of GDP. The good news is that we have been moving in the right direction in recent years, and as a result, the deficit has receded from a scary 10.4% of GDP to 7.7% currently (by my estimate). Spending is still very high relative to GDP, however, higher than at any time since WW II, and that continues to be a burden that is slowing economic growth. 

25 comments:

mmanagedaccounts said...

The private economy can grow us out of our sovereign debt overload. We need robust growth. How to get it? We are in a deleveraging environment and the consumer accounts for almost 70% of GDP, so are we destined to anemic growth at around 2% or can we grow 3-5%? I feel like I'm living under the 21st century Hoover administration. Where is Harding when we need him?

Dr William J McKibbin said...
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Dr William J McKibbin said...
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Dr William J McKibbin said...

Sounds like everything is on track for the future...

Dr William J McKibbin said...
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Benjamin said...

It is odd that the USA ran federal surpluses during Clinton and federal spending has slowed under Obama---in sharp contrast to GOP presidencies.

The GOP ever talks the talk, but I have not seen the walk since Eisenhower.

Let's hope for a truly responsible party some day. Probably a new party.

Benjamin said...

Speaking of federal debt---now to speak of the unspeakable.

Essentially, the Fed has monetized some $2 trillion in debt in the last couple years. The markets now expect deflation---hardly the hyper inflationary result predicted by the usual orthodoxy.

QE will have to become part of the common arsenal for economic growth. So bad?

Remember, both John Taylor and Milton Friedman robustly advocated QE for Japan. With no moral qualms, no fear-mongering about hyperinflation.

The extra good news in this is that we hand to our children a less-levereaged nation.

Thomas said...

Welcome back Benjamin !

mmanagedaccounts said...

I vote Congress cut spending and eliminate the debt ceiling. How many agencies could be eliminated if we reduced government to its size under Ike?

William said...

I sometime wonder if Benjamin's comments are written by Scott Grannis himself as kind of a foil - to get the discussion going - especially since Benjamin was consistently the first one to post on every article.

How could he know so quickly when each article was posted? And Scott has been on vacation a lot recently and Benjamin's posts also vanished for a while. Curious.

mmanagedaccounts said...

Welcome back, Benjamin. Your persistent ranting over monetary easing and Japanitis have been missed.

William said...

mmanagedaccounts said...
"I vote Congress cut spending and eliminate the debt ceiling. How many agencies could be eliminated if we reduced government to its size under Ike?"

The major problem is that the population is vastly larger than in the 1950s, especially the percentage of older citizens on Social Security and Medicare. And we have been fighting two wars and have greatly expanded "Homeland Security" since 9/11.

Talk is cheap: where would you like to begin cutting - with your over-weight, hypertensive, diabetic parents who are taking 12 different medications?

Benjamin said...

Thanks for the comments. I enjoy everybody's comments as well, and I especially enjoy Scott Grannis' fine blog.

I am not Scott Grannis, btw, and I am flattered by the comparison.

Hans said...

Good to have you back, Ben Jamin!

William, please stop being so silly with the conspiracy theory...

Dr William J McKibbin said...

The emerging blowup of Europe will put the austerity hawks to the test...

William said...

Gallup: Most (68%) say Bush to blame for weak U.S. economy, poll finds
About 68 percent of the more than 1,000 adults surveyed nationwide said Bush, who left office in January 2009, deserves a "moderate amount" or a "great deal" of the blame for the U.S. economic woes compared to 52 percent who pointed to his successor Obama, the poll found.

Poll respondents who identified themselves as Republicans were split, with 49 percent saying Bush deserved a moderate amount or great deal of the blame while 51 percent said Bush deserved not much of the blame or none at all. They expressed even more blame for Obama, however, with 83 percent holding him largely responsible for the state of the economy, the poll found.

Among Democrats, 90 percent blamed Bush for the weak economy and only 19 percent said Obama should carry much of the blame, according to the poll, conducted by telephone June 7 to 10.

http://www.reuters.com/article/2012/06/14/us-usa-campaign-economy-bush-idUSBRE85D0XI20120614

Unknown said...

Somebody familiar with the workings of the bond market here - Scott? Anyone? - correct me on this reasoning if I'm wrong.

Let's say the FOMC announces no new easing on Tuesday, and lets Operation Twist end as planned.

I'm thinking, the market could react exactly the opposite most would expect. Instead of tumbling on the lack of new stimulus, instead it could actually stage a huge rally (albeit perhaps with a delayed reaction - minutes? Hours? Days? Dunno).

The reason is as follows: Under OT the Fed is a large buyer of long-dated bonds. When a large buyer of anything removes themselves from the market, a large customer goes away, and the price will inevitably crash.

So, if the FOMC announces no new treasury purchase operations, at some point market participants will realize, "Hey, wait a minute - suddenly there's going to be a lot more long-dated bond available than there was before!"

So instead of the stock market taking a dive, the bond market will take a dive. And of course, when bonds go down, stocks go up.

Am I missing something?

Unknown said...

^
Oops, I meant Wednesday not Tuesday.

Unknown said...

^
One more comment on that same topic ...

Remember last year when the Fed announced Operation Twist? At first the market rallied a bit, but then all of a sudden (like, a half hour later) it took a huge dive. The reason for this was because portfolio managers realized the Fed was going to be buying a lot of long-dated Treasuries, and with the S&P credit downgrade and Eurozone problems already making Treasuries in high demand, these managers suddenly realized they'd better grab as many long bonds as they could before the Fed started buying them. The only way to do that was to sell stock to raise money to buy the bonds.

So this time, the opposite would happen!

Bob said...

Interesting thought Unknown.

William, that poll only shows the ignorance of the voting public and reinforces the idea that an ignorant eloctorate will soon lose its Republic.

Please outline the GWB economic policies that led to our current economic malaise.

For the record I am not a die hard GWB fan, but think the idea that his policies are responsible for todays problems is dillusional at best.

Thanks,

Bob

Hans said...

How right you are, Bob, as those who after 3 1/2 years, continue to lay blame on the previous administration are simply someone without a plan of execution.

William said...

Bob and Hans, briefly George W Bush 1) prided himself on being the"home ownership President" 2)Bush and Cheney appointed department heads and council leaders who they knew didn't believe in government regulation and enforcement of banking, SEC, EPA, etc. regulations, 3) Bush reappointed Alan Greenspan as the head of the Federal Reserve who strongly believed that markets including the housing market were self correcting and 5) Bush's general approach was Laisse Faire (hands off) government - let the markets work.

The markets including zero documentation mortgages, sub-prime mortgages, bundling of mortgages of suspect quality as AAA, derivatives on derivatives in a totally unregulated non-transparent market did "work" motivated by greed until the whole Ponzi skeem collapsed when Bush's Secretary of the Treasury, Hank Paulson let Lehman Brothers fail.

In 2008, George W Bush entered office with a project US budget surplus of $200 Billion and he left office in 2000 with HIS own projected government deficit of $1.2 Trillion.

Now please - if you can - explain to me why George W Bush had no responsibility for this disastrous turn-around in US fortune.

Hans said...

Of course, he is partly to blame and as well presidents up to LBJ and CONgress, William...

You only scapegoat the Bushies and Repubcos, rarely saying anything about the Leftocrats..

The resell of mortgages where never derivatives, nor where they never regulated which is why we have this mortgage meltdown in the first place.

I will ax you again, how about a link for your Bush claim of a budget surplus? BTW, I have all year so take your time...

The Bush clan was horrible for America, as he was left of center and lusted for his second term..

Let's face it, William, you love regulations and big time government because you never take the other side to task..

Paul said...

Scott,

"As my good friends Art Laffer and Steve Moore note in their op-ed in today's WSJ, this supports Obama's claim to have overseen an extended period of very slow growth in federal spending.

Did we read the same article? Obama's claims are obvious lies even while still being sorta technically true because of the supposedly one-time emergency spending of fy2009. Check out Peter Ferrara's column from yday for some context: President Obama: The Biggest Government Spender In World History

Bob said...

Well said Hans,

William, as I said I am not a raving fan of Bush's. So my argument does not come from a political bias in support of him or of Republicans, who, IMO are not much better than Democrats. They are all big government spenders. But let me take some task to your comments.

1) Bush warned on at least two occasions, at least one of those a State of the Union address, that Fannie and Freddie were in the dumps and that Congress, who has oversight was failing their responsibilities. Your comment that Bush claimed to be "the home ownership President" says nothing about actual policy. 2) Who are these department heads who Bush knew were not regulatory enthusiasts. Besides, bank regulaton on the federal level is a Congressional issue I believe. 3)Your comment about the reappointment of Greenspan smacks of conspiritorial baloney. I don't thing Bush should have reappointed Greenspan but he was a popular figure and Bush, being a political animal figured it was the right thing to do, not becuase he was trying to collapse the American economy through bad homeownership policy. 4)there is no four. 5)Well, he is a Republican more than a Democrat even if he is a RINO.

The roots of the mortgage/housing crisis that has led us into the economic malaise that we are currently enjoying are from an overzelous mostly, but not exclusively Democrat expansion of government into the private sector. Had there not been a push by big government to allow homeownerhip to those who could not afford it we would not be in the mess we are in now. That's the plain and simple truth and it has its origins with the Community Reinvestmen Act as the instrument by wich the liberal minded congressmen implemented, along with Clinton and a number of Republicans the policies that eventually culminated in bad banking, and bad Wall Street investments.

As for George Bush, one can argue till the cows come home on his Presidency, but GDP was at a virtual stand still when he took office hovering at just above 0%(the cost of a balanced budget?). Seven and a half years later GDP went from $12T to $14T, unemployment was below 5$, the budget deficit, which CBO projected would go over (at the time as astonishing) $800bil actually went to just over $400bil and was projected to be in surplus when the financial crisis hit.

So you want to blame Bush for deficit spending because his administratin provided the origial TARP bailout, that probably saved the banking system from collapse?

GWB was not a great presidnt IMO. He made a lot of mistakes and missed a lot of opportunies, but he is not the scapegoat liberals constantly paint him to be. An ever expanding Federal government is the source of the loss of our Republic.

Truthfully William, you sound like just another Bush hater.