Wednesday, April 13, 2022

Tax revenues soar, spending still in la-la land

Deficit spending was off the charts during the Covid pandemic, and it's finally beginning to come back to earth. Biden has indeed overseen the largest reduction in the federal deficit in history, but the deficit is still in la-la land despite having fallen precipitously. What's saving the day is a massive surge in income tax revenues fueled by a recovering economy, significant inflation, and soaring stock prices. 

Chart #1

Chart #1 shows the 12-mo. rolling sum of federal spending and revenues, plotted on a log scale to emphasize  rates of change (i.e., straight lines reflect a constant rate of growth). Revenues have surged and spending has dropped from outrageously high levels, but spending is still miles away from what formerly would have been termed "normal."

Chart #2

Chart #2 shows the composition of federal tax revenues. All sources of revenue have improved, but individual income taxes account for the lion's share of improvement for the federal fisc. This in turn has been driven by a huge recovery in the number of people working, rising incomes, inflation, and surging stock prices (some of which translates into capital gains taxes). 
Chart #3

Chart #3 shows the federal budget surplus or deficit as a percent of nominal GDP, with dollar amounts shown for two periods. The deficit has shrunk dramatically in the past year or so, but it is still at levels (relative to GDP) that in prior years would have been considered unimaginably high.

Chart #3

Chart #3 shows spending and revenues as a percent of GDP, in addition to the post-war average for each. Note that revenues have recovered to their post-war average but spending remains extraordinarily high.

Chart #4

Chart #4 compares the unemployment rate to federal spending as a percent of GDP. It should be pretty clear that spending is largely driven by the unemployment rate, which is another way of saying that Congress attempts to alleviate the pain of recessions by spending lavishly. In the case of our recent Covid-lockdown recession, Congress effectively went berserk and over-spent ridiculously. Spending is still in la-la land, and by an order of magnitude which goes a long way to explaining why we have so much inflation. Why? Because the surge in spending was largely financed by money printing, as I have documented repeatedly with my charts of M2 growth.

The last thing this economy needs is more spending (affectionately referred to by politicians as "stimulus"). If there's a silver lining to the Biden/Harris incompetence cloud, it's that Congress is unlikely to be able to muster the votes to authorize yet another round of "stimulus."

Long-time readers and supply-siders know that government spending never stimulates. It's just a headwind for the economy because government is commandeering the economy's resources and effectively wasting them. The government can never spend money as efficiently and as effectively as the private sector can.


  1. Speaking of wild spending and la-la land, Bill Maher recently mused on Joe Rogan's podcast that he could vote Republican based on the ridiculous spending of the government. You know the world is in a state of flux when Bill Maher even contemplates voting Republican!

  2. Veterans Affairs programs would see a 20% increase in funding under the White House budget plan for fiscal 2023 released on Monday, pushing the department’s spending total above $300 billion for the first time.--Military Times

    The Pentagon’s $773 billion fiscal 2023 budget request, released March 28, is highlighted by inflation, a classified new National Defense Strategy, and a continued focus on China as the pacing challenge while also categorizing Russia as an “acute” threat.--Air Force magazine

    That comes to $1.07 trillion. Pro-rated interest on the net federal debt, add about $150 billion.

    There are some defense items not listed here, so call it $1.3 trillion for national defense.

    About $4,040 for every man, woman and child in the US. An average family of four=$16k. And more next year, and in perpetuity thereafter.

    The Ukraine war is as ugly as it gets. No doubt, such spending will continue for years.

    The Founding Fathers envisioned a citizen-soldier military, and avoiding foreign entanglements. If you believe in the America's role as a global policeman, then accept such outlays, along with the federal government penchant for spending $1 when a dime could do.

    I wonder if some serious streamlining, and a return to a citizen soldier military, is a better option.

    A one-time bonus exit payment for veterans would be far cheaper.

    And yes, I would eliminate entire federal departments, such as Education, HUD, Commerce, and USDA.

    Much smaller social welfare programs, but much tighter labor markets.

    Well, nice to dream about.

  3. "If you believe in the America's role as a global policeman, then accept such outlays"

    Yes, I do believe we have no choice. There is no other that can take on the role. We can agree that the manner of foreign intervention should change - no more attempts to establish democracies in hostile places. More walk softly but carry a big stick realpolitik. But isolationism as a reaction to populist revolt against "globalism" is just obviously a path for a less safe world.

    The number $773B (or $1T) of course is a big number, but our economy is a bigger number. Spending equates to just 3.5% or so of GDP - approaching half of what it was in the 80s.

  4. " But isolationism as a reaction to populist revolt against "globalism" is just obviously a path for a less safe world. "

    Isolationism is not what is being advocated.

    1. having other nations pay up to their documented commitments would be helpful- as the do not do in NATO, as one example
    2. Letting Asian nations similarly pay for their defense would also be helpful. Am I the only one who remembers SEATO?
    3. in other words, let the US and anybody else supply defense hardware and maybe a small number of "advisors"- and stop there

    People need to read President Washington's truly awesome farewell address:

    "Harmony, liberal intercourse with all nations, are
    recommended by policy, humanity, and interest. ... Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases
    where no real common interest exists and infusing
    into one the enmities of the other, betrays the former into a participation
    in the quarrels and wars of
    the latter, without adequate inducement or justification. "

  5. Randy:

    I disagree, but fair enough.

    However, I think you should recognize the $300 billion in veteran's outlays are a cost of national defense.

    Public pensions are a huge burden on taxpayers, local, state and federal.

    In addition, even if you like the US as world's cop, we could still go to a cheaper citizen military, and a one-time exit bonus for veterans.

    A serious examination of the vulnerability of surface ships may be necessary also.

    In brief, any public entity become ossified and fat over time. That goes double for any venerated public entity.

  6. wkevinw-

    You raise interesting points. From what I read, Japan, S. Korea and Taiwan have the capability to develop nukes.

    Recent events suggest no one will dare invade a nation so armed.

    In addition, all three nations have become rich and technologically advanced. Add Australia to the mix, which already has nukes. India has nukes.

    Yet, in DC they are broadening the US military mission from "the Pacific" to the "Indo-Pacific." These above-mentioned nations (partially excluding India and Australia) are considered under the US nuclear umbrella.

    When you look at a Obama, Trump or Biden, do you really think US is up to the task of global leadership?

    Surely, these nations can provide for their own defenses, or revive SEATO but without US participation.

    And as I said, surface vessels are vulnerable. Do we really want the US to be triggered into a nuclear war in the Indo-Pacific?

    Ukraine is on Europe's doorstep. Germany is a large and wealthy nation, technologically advanced. If the Europeans do not take an aggressive lead on blocking Putin...then the US should?

  7. "do you really think US is up to the task of global leadership? "

    Since WW2, military technology is about 100-1000x more effective. The longest range missiles were a few hundred miles then, and the longest range plane was ~2000 miles. There were no nukes until 1945. So, the task of defensive measures today is huge and expensive. Threat of military force is the first tool of "global leader"/diplomacy, and the US needs to plan for this.

    Can anybody really say they could follow through with such a defense/foreign policy strategy "globally"? I think that's unrealistic.

  8. Scott do you see food inflation dis-inflating or outright deflating any?

  9. Does the hypothesis that inflation and high corporate taxes increase bank leverage seem reasonable?

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