Every day I hear some very serious chinstroker caterwauling about runaway government spending. Just today, I heard Rep Boehner intimate that the debt ceiling is a legitimate tool to wield against the alleged spending threat.
Me…I just don’t see it. And that’s because it’s not in the numbers. Like the imminent inflation, interest rate spikes, and Greek-like implosions these scolds endlessly warn us about, it’s just another DCPM (DC phantom menace).
The table shows spending, revenues, and deficits as a share of GDP, along with the unemployment rate stuck in there to give you a sense of the business cycle, a crucial factor here which the spending freaks ignore.
Spending rises as a share of the economy starting in 2008, along with the unemployment rate, an automatic—and highly desirable—function of the safety net kicking in, along with stimulus outlays in 2009, all in the interest of offsetting some of the damage from the Great Recession. Revenues fall, also expected and desirable, because that’s what happens in a progressive tax system when incomes take a hit (it’s actually another form of stimulus).
Spending came down a bit in 2010 and again last year, to 22.8% of GDP—remember, 21% is about the historical average. So, really folks, what’s the big freakin’ deal on the near-term spending side?
And look at that unemployment rate…does that look to you like it’s signaling us to move towards austerity?…like this would be a fun time for a debt ceiling fight?
As a card carrying CBPP employee, let no one accuse me of being soft on the deficit…we ultimately have to pay for our spending, and that’s why I’ve ceaselessly advocated in these pages that getting on a sustainable budget path in the medium term must occur through tax increases and spending cuts (the longer term spending challenge is very much wrapped up with health care costs). But the fact is we’ve already cut spending by $1.5 trillion over 10 years, and we’ve done nothing yet on revenues.
In fact, if any column in the table is flashing red (other than unemployment), it’s the revenue column. Since 2009, revenues are up only 0.7% of GDP while spending is down 2.4%. That’s the largest three-year spending contraction since the mid-1950s. The 3.1% of GDP decline in the budget deficit since 2009 is the largest three-year drop since the 1940s. To be fair, it’s also the case that the increase in the deficits up to 2009 were historically very large as well. But they needed to be.
So if you want to find a rationale for jamming the nation into recession, you’ll need to find a reason other than profligate government spending. It’s just not in the numbers.
PS: I did some of my own caterwauling about this point months ago, looking at real outlays over the past few years. See figure at the end of this post.
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The other thing to remember about the spike in spending per GDP is the denominator. A decline in the GDP or slow down in GDP in itself would make the ratio go up; ie. the slow growth in the economy and normal growth in spending has meant the ratio has increased.
A lot of people don’t take into account the effect of the recession when expressing spending and revenue as a percent of GDP. But, GDP fell. Sharply. When the denominator of a fraction decreases, the fraction itself increases. Expressing revenue and spending as a percent of GDP over the course of a recession makes it look like government went on a drunken spending spree and that revenues didn’t fall by much.
So, I took the liberty of plotting spending and revenue as a percent of potential GDP: http://research.stlouisfed.org/fred2/graph/?g=dAF
Paints a very different picture.
This fiscal issue can be resolved without raising taxes. We need to stop listening to the White House’s rhetoric and start listening to the experts. Steve Forbes wrote a letter to Speaker Boehner, laying out a sensible plan as to how to manage this fiscal crisis. A pretty thought provoking and interesting letter for those who are interested. Here’s the link.
forbes.com/sites/steveforbes/2012/12/06/message-to-gop-no-tax-increases-go-on-offense/
Ok, I read the letter and it is kind of a tired rehash of the ideas Romney ran and lost on. I’ll highlight a few…
“I. The House passes a bill extending for a year or at least six months all the cliff items – current income tax rates; the Alternative Minimum Tax patch; yes, even those Social Security payroll tax cuts. The whole kit and caboodle. The same with sequestration.”
The only “kit and caboodle” items Forbes mentions are the tax increases. I guess he is fine with all the spending cuts. Someone who ignores half of what is “in” the fiscal cliff can’t be serious.
“The point to make is that the U.S. economy is headed for a recession. One ill omen is that business investment is faltering.”
Exactly! So if business investment is faltering, who is going to make up for it? If we nuke revenues, the gov’t can’t step in, thus making things worse. BTW, what happened to all the jobs and investment the “job creators” were supposed to do with the tax cuts they’ve had this past decade?
The rest is talking points – open SS to financial markets, no money for Obamacare, save SS and medicare for *current* folks.
Not there?! Other than that we’re spending MORE than we make EVERY year?! That’s not a problem to you? At what point does debt get too big to be repaid?! What happens when the rest of the world realizes that they’ll never get back the money they “invested” in US dollars cuz we destroyed our currency by devaluing it so badly with all this reckless debt accumulation?! If a person did this kind of thinking with their checkbook they’d be bankrupt and thrown in jail! What’s that say about the practice in general? That our gov’t is above the law?! That we’re too stupid to do it and get away with it?! No, most obviously it says that it’s wrong, reckless, and it WILL come back to haunt us someday.