Monday, November 14, 2011

Federal budget update

This chart includes federal revenues and outlays through October, 2011. The budget deficit was $1.26 trillion in the previous 12 months, which is about what it's averaged over the past year. But the big-picture takeaway is shown in the chart above. Federal spending has more than tripled since 1990 (+209%), while nominal GDP rose only 172%. Revenues are lagging, with an increase of only 130%, but that is easily explained by the depth of the recent recession and the very tepid recovery to date. The lion's share of the budget deficit is due to a hugely disproportionate increase in outlays, which, contrary to the Keynesian theories that were used to justify the increased spending, has almost certainly contributed to the economy's current weakness.

If deficit-financed fiscal expenditures could strengthen an economy, ours would be one of the strongest in the world right now. Instead we find ourselves following perilously close, and in the footsteps of, the PIIGS. The solution for all countries burdened by bloated government spending should be obvious but not necessarily painful: simply enforce serious cutbacks in the growth rate of spending. For example, if federal spending were frozen at current levels, and revenues were to increase at only the rate they have posted in the past year (a rate that would be very low compared to the typical growth rate of revenues following recessions), then the federal budget would be balanced in less than 7 years.


Benjamin Cole said...

I would be nice to see federal outlays capped at some fraction of GDP, such as 16 percent. With reductions in military-homeland security -VA outlays, elimination of the USDA, and some trims in Medicare, it is doable.

Cato Institute has called for cutting military outlays in half, and that was before outlays doubled in real terms (in the last 10 years). Ron Paul has called for closing overseas military bases. It is sad to reflect that the right-wing (see FDR vs. Senate Republicans) used to be against a large military establishment, which they considered a pawn of the D-Party.

On revenues, a lower rate with no exclusions makes sense, such as 16 percent flat consumption tax, perhaps excluding food and medical. Add on a heavy gasoline tax, and taxes on drugs, such as cigarettes, booze, pot, whatever.

No taxes on dividends, corporate profits, wages.

Well, nice to dream.

To get the economy going, we need Market Monetarism, a Friedmanite idea. For now, higher targets for growth would be good.

John said...

"Revenues are lagging, with an increase of only 130%, but that is easily explained by the depth of the recent recession and the very tepid recovery to date."

No sir. It is easily explained by the Bush tax cuts.

L.A. said...


The bush tax.cuts have been in place most of.the 21st century, during which time revenues increased dramatically. Revenues also decreased in the recession. So the one constant this century is the bush tax cuts. If one makes the argument that the cuts are solely responsible for the reduced revenue, then obviously from the chart one can make a case that revenues increased solely die to the tax cuts. Both arguments are erroneous and simply nonsensical.

John said...


Look at the graph. Revenues climbed steadily from 1990 to 2001. After thatn they have been erratic while spending soared. What they did, with Greenspan's approval was substitute a housing bubble and cheap money for sound fiscal policy.

Frozen in the North said...

How do you actually freeze government expenditures? You tell all government employees -- no more salary increase ever, you tell military contractors no more cost overrun ever. You tell the FAA, no more new systems. You tell FIMA, no more disasters.

Life is just not that simple, sorry! You need more than a statement "Freeze expenditures" you need to make decision on the programs what you will cut and what you will not cut. It takes a will and courage; two things in short supply in our political classes, and frankly, even shorter in Americans -- who all seem to believe that the trick is to cut the "Freebees" to those who don't deserve them, just don't touch SS and Medicare or defense.

Hopeless, until America hits the wall

Public Library said...

Agree with Frozen. America has a case of the short-termism. The whole political process is designed for the next election cycle, not making good medium term decisions for the country.