Thursday, December 10, 2009

Fiscal policy update

The federal budget numbers improved again in November (on a rolling 12-month basis), mainly because spending in recent months was less than the extraordinary levels of spending in October and November of last year. Nevertheless, it remains the case that both spending and tax revenues are "off the charts" for the post-war period. You have to go back to the early 1940s to find spending running at a higher share of GDP than today, and tax revenues running at a lower share of GDP. That was the time (WW II) that our debt/GDP ratio reached its highest point ever: almost 120%, whereas today it is about 54%. So today's figures are not actually unprecedented, but they are close.

The last chart puts the current budget picture into vivid relief. Spending is out of control due to bailouts, stimulus spending, and a robust increase in ongoing government spending and involvement in the economy. Revenues are extraordinarily weak thanks to the sharp economic downturn and only a few months of modest recovery.

From a supply-side perspective, what I would like to see is a cancellation of the stimulus spending, since it has already proved itself ineffective, and the application of the recovered funds to increase the private sector's incentives to work and invest. At the very least we should have a lower corporate tax rate to allow our businesses to compete in the world, and we should not allow the Bush tax cuts to expire at the end of next year. I think these two simple steps—calling off the stimulus, freezing tax rates at current levels, and reducing the corporate tax rate—would be a tremendous boost to confidence and investment, and would thus give the economy the "kick-start" that everybody seems to want.


Colin said...

Scott, it is my understanding that the surpluses you show in the third graph are basically a myth, as the national debt increased in size every year during the 1990s:

Which side of history is correct?

Bill said...


You might as well say that you would like Obama and all the liberal Democrats to resign and have the country instead run by fiscally conservative politicians. Don't forget, Obama told Charlie Gibson at one of the debates that it was "fair" to raise or eliminate the capital gains tax even if it meant less revenue!

Scott Grannis said...

Colin: the surpluses were NOT a myth. The source you link to makes the mistake of using "Total Public Debt Outstanding" as the measure of our national debt. Since a good portion (over one third currently) of this debt is held by the government itself (intragovernmental holdings), it is not really debt. This debt exists only as an accounting fiction. If you owe something to yourself, is that a debt? Not in my book.

The better measure of national debt is "Debt Held by the Public." This measure of debt did decline during the surplus years, and Treasury bills and bonds outstanding fell by a corresponding amount.

Scott Grannis said...

Bill: it may sound impossible, but there is evidence to suggest that Obama may be beginning to think more like a supply sider. Check out Larry Kudlow's post from yesterday.

Colin said...

Scott, thanks for the clarification.

Unknown said...

Just read Larry Kudlow's post from yesterday, and it sounds that way, but on the other hand hasn't Obama said a lot of stuff, of which none of it he has done? Also, if I am not mistaken, part of the underlying agenda of Obama’s Administration is to gain more power/control(i.e. the rushed stimulus package earlier this year, healthcare reform, cap and trade, etc.), and being a supply sider does not necessarily accomplish that goal. Sure we can be optimistic, and time will tell - -I hope you are correct. Someone once told me a story; Two people are standing on the top floor of a tall building. Both are blown off the top over 100 floors up. The Pessimist starts to pray for he looks down and sees his death. The Optimist, as he passes the 4th floor says, "Well, so far so good!"

Again thanks for your great posts

Public Library said...


Great post, send it to Washington ASAP!!!

Scott Grannis said...

I think this bears repeating here: one of the reasons I've been optimistic all year long is that I have thought the Obama/Pelosi agenda was way too far to the left for the average American, and that Obama would find it increasingly difficult to purse a hard-left agenda. The decline in his popularity has pretty closely matched the rise in the stock market. This has been a sigh-of-relief rally, as the market gradually realizes that we are not going to end up with a totally socialized economy. The rise of the Tea Parties is an important part of this story also.

DaleW said...

I like to look at the federal deficit counting transfer payments to households. I get that by looking at the personal income accounts and then add personal current transfer payments back to the government spending & investment account. This gives me a clearer picture of what the government is spending, personal consumption expenditures in the private economy, and personal saving in the private economy. As entitlement payments have become a large and large portion of the economy over time, it screws up the aggregate and needs to be pulled apart to provide a clearer picture of what is happening in the non-government economy.

Scott Grannis said...

Last time I checked, transfer payments accounted for just over half of federal spending. It's undoubtedly higher now.

brodero said...

Remember Great Britain after the Battle of Waterloo had a Debt to GDP Ratio of 237%....

DaleW said...

Transfer payments / total government expenditures = 43%. Federal transfer payments / federal expenditures = 62%.

The government component of GDP is was 20% last year, which doesn't seem unusual relative to historical levels. When you adjust for transfer payments, however, government spending as a percentage of GDP is hitting new highs, at 33.1%. Ex WWII, it has never been higher. This is only a few points shy of double the level experienced during the Depression.

As a corollary, the worries who say we are spending ourselves into oblivion should observe PCE as adjusted equates to 57% of GDP, below the 1929-2009 average of 58.6%.

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