Federal deficit collapses

If President Obama wants to distract voters' attention from the ongoing failure of Obamacare and the miserably slow recovery, he should simply direct everyone to this blog post. Under his watch, the federal budget deficit has collapsed by two-thirds, from almost $1.5 trillion in his first year as president (in which he inherited a lot of emergency spending from the Bush administration and began spending the almost $1 trillion included in his ARRA) to just under $0.5 trillion in the year ending last March. 

The chart above shows the federal deficit as a % of GDP. By this measure the deficit has plummeted from a high of 10.2% of GDP in 2009 to 2.9% (my estimate) in the 12 months ending last March.

This rather extraordinary achievement was not due to any of his initiatives, however. As the chart above shows, the big reduction in the deficit has been the by-product of flat to declining spending in recent years and multi-year increase in tax revenues. Most of the reduction in spending can be credited to a deadlocked Congress (which has ignored Obama's repeated requests for ever-rising spending), and to declining costs for social safety nets (mainly unemployment insurance, which still remains unusually high). The bulk of the increase in tax revenues is due to an expanding tax base (e.g., increasing numbers of jobs, rising incomes, and rising corporate profits, all of which flow from even a weak recovery), with a modest boost attributable to the higher tax rates which took effect last year.

Despite effective marginal tax rates that are now at their highest level ever for many taxpayers, tax revenues relative to GDP are still relatively depressed. That's mainly a reflection of the weakness of the current recovery, which has yet to create more jobs than existed at the end of 2008. There would have been upwards of 10 million more jobs today if this had been a typical recovery, and that would show up in the form of much stronger revenues, which would probably be well over their post-war average of 17.5% of GDP by now.

The reduction in spending relative to GDP, on the other hand, has been extraordinary—we haven't seen anything like this since the unwinding of WW II spending. Federal spending topped out during WW II at over 40% of GDP in 1945, then promptly collapsed to 14.7% by the end of 1947. Then, as now, a huge decline in government spending failed—despite the warnings of Keynesian-trained economists—to generate a depression, and failed to send the unemployment rate skyrocketing. Supply-siders, in contrast, have an answer for what happened that makes sense: when the government controls fewer of the economy's resources, the private sector has more room in which to practice that in which it uniquely excels: entrepreneurship, cost-cutting, risk-taking, and productivity gains.

One reason Obama is unlikely to link to this post: If we hadn't had all that massive emergency and "stimulus" spending in the 2008-2012 period, the economy would be much stronger today. But now that the spending has been scaled back there is a decent chance that the private sector can give us some better growth numbers going forward. Those chances would rise appreciably if Washington could manage to reduce today's unprecedented regulatory burdens (e.g., Obamacare, Dodd-Frank), reduce corporate tax rates from the highest level of any developed country, and simplify our mind-numbing and hugely burdensome tax code in exchange for a reduction in marginal income tax rates.

UPDATE: Charles Koch has written a brilliant and powerful essay in the WSJ on many of the problems that need to be fixed: "I'm Fighting to Restore a Free Society."

If there's any reason to be optimistic these days, it's that there are so many problems out there that could be fixed in relatively easy fashion.