Thursday, July 12, 2012

Federal budget update



These charts summarize the current state of the Federal government's finances. The best thing to be said is that revenue growth has outpaced spending growth since the end of the recession, with the result that the deficit has declined both in nominal terms and as a percent of GDP. The worst thing, however, is the deficit is still $1.23 trillion dollars over the past year. In the "thank goodness for small favors" department, spending as a percent of GDP has dropped from a high of 25.3% in 2009 to 23.5% today. That's still higher than during the peak of the early Reagan years, however.

One other thing to note is the dismal performance of revenues in recent years. They have risen, but at a very slow pace, and that is almost entirely due to the fact that the recovery has been miserably slow; the tax base is still way below where it was pre-recession.

The best way to fix the deficit is to keep revenues from rising in nominal terms (as has been the case since mid-2009), and find ways to boost employment. Allowing the Bush tax cuts to expire for those earning over $250K, as Obama has proposed, won't do anything to achieve that goal. More likely, it would retard the growth of employment since taxes on capital would rise significantly, hurting small business owners and entrepreneurs the most. Soaking "the rich" for a few extra dollars has a payoff that is much lower than the payoff of an increase in the size of the workforce.

9 comments:

Dr William J McKibbin said...

Government spending must be drastically reduced -- all forms of government spending should be subjected to an immediate 40% plus reduction -- if those cuts must be allocated, so be it, though I'm fine with across the board cuts -- no one should doubt these cuts are coming -- many in America are prepared to take up arms in order to confront government and taxation that benefits the few -- civil war over excess government spending cannot be ruled out -- the regional battle lines are already being drawn right before our eyes (think East versus West) -- watch and learn -- the government must cut spending or risk a change of government in my opinion...

PS: Watch for a sudden redeployment of US troops for reassignment into homeland security roles, if only as a precaution -- the upcoming presidential election is likely more about who is commander-in-chief, than about other imperatives at this point...

PPS: I would not be surprised to hear the California governor calling for a return of its national guard forces in the near future...

Lawyer in NJ said...

By all means, extend the tax cuts in full for two years, but our infrastructure is in terrible shape; we need targeted spending there. Compromise shouldn't be an anathema, but that's what it has become.

Benjamin said...

It is nice to see that federal revenues, as percent of GDP, are actually in long-term decline, a very different picture than from what your hear in certain hysterical quarters (which now defines large parts of both political parties).

Now time to cut federal entitlement spending, and slash---cut in half or more---federal agency spending.

Pedal Tramp said...

I really appreciate your reasonable and well informed analysis. Found you on SA and now visit here frequently. All the best to you.

Scott Grannis said...

Pedal: thank you, and welcome!

John said...

"Soaking "the rich" for a few extra dollars has a payoff that is much lower than the payoff of an increase in the size of the workforce."

Just put the tax rates back where they were under Clinton. Good things will happen, as they did then.

Paul said...

John,

And let's roll back to the spending levels and government programs we had under Clinton also.

Right?

Bob said...

Lawyer,

As a nonscientific observation. My wife and I recently completed a 1 year RV trip around the U.S. Whe hit 41 states and just over 22,000 miles. Besides being a fabulous experience we found the roads and bridges that we passed over to be not in terrible shape. Were they new? No. Are there areas that need attention? Yes. Many a stretch of highway was being worked on as were a number of overpasses and bridges, all of course, with the everpresent sign telling us how our tax dollars are being spent.

One can always make the argument that the infrastructure needs improvement. The country is now 236 years old. But infrastructure spending will never create the employment necessary to sustain a recovery. It can produce better roads and bridges but will do little to create new enterprises.

Bob

John said...

Paul:

Right. I'll take that deal.