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Saturday, October 23, 2010

Why we have a deficit

Deficit spending is the official excuse for the Tea Party revolution and the force that threatens to drive our economic policy for the next few years, just as it is already driving the British government. Our gigantic deficit for fiscal 2010 is now projected at $1.294 trillion dollars, about 10% of our GDP. Just ten years ago, in fiscal 2000--the last year fully within the Clinton Administration--we had a surplus of 2.4% of GDP. This ranks as a financial revolution comparable to what happened from 1933 to 1950, or from 1979 to 1991 or so, and given how heated issues of government finance have become, it behooves us to ask how all this happened. Thanks to the magic of the web, figures are near at hand.

Budgets, of course, are composed of revenues (mostly taxes) and expenditures. Let us begin with taxes. In fiscal 2000, federal taxes brought in 20.6 % of GDP, including 10.2% of GDP from federal personal income taxes, 2.1% from corporate income taxes, and 6.6% from Social Security taxes. This year they are estimated to bring in 14.8% of our GDP, that is, almost 6% less. Judging from figures from the last pre-recession year of fiscal 2007, about half of that 6% is due to the Bush tax cuts and the other half is a result of our economic collapse. The composition of that 14.8% has also changed dramatically: only 6.4% of it comes from personal income taxes, 1.1% from corporate, and 6.0% from Social Security taxes. In 2000 the progressive income tax brought in about 66% more than the regressive social security tax. Now they bring in nearly the same amount of money. In short, restoring the Clinton-era level of taxation would significantly reduce the deficit, in and of itself. Yet I do not know of anyone besides myself who is openly advocating that that be done.

While taxes have gone down, outlays have gone up--way up. Federal spending was 18.2% of GDP in 2000; it is 25.4% of GDP now. We can disaggregate this 33% increase in the budget as a share of GDP. The defense budget took up 2% of GDP in 2000; it now takes up 4%, or twice as much. The entire increase can be chalked up to the war on terror, an undertaking of most dubious utility. Spending on humman resources has gone up more, from 11.4% of GDP to 17.1%, a 6.7% increase. Within that 6.7%, medicare, other health spending and social security have each added about 1% of GDP to the total, and another category, "income security" payments, has added 2% more. I need to research that category, which I suspect is composed mainly of federal pensions. The remaining 1% or so of the increase is divided among veterans' benefits and education.

One astonishing item caught my eye--one that certainly needs more explanation. Thanks to George W. Bush's impact on the budget, the national debt is more than twice what is was in 2000--yet interest payments are actually down as a share of GDP, down an entire point from 2.3% to 1.3%. Thanks to the growth of our economy and above all, I would guess, to the lowest interest rates in history over the last decade, we hardly pay more to service our debt now than we did ten years ago. Meanwhile, stimulus money is already a relatively small entry, presumably under the employment and training category.

The source of our deficit, then, is pretty clear. About 1/4 of it is the responsibility of the Bush tax cuts, and another 1/6 is the fault of the Iran and Iraq War. Yet another 1/6 comes from rising health care costs, and another 1/4 from increased social security payments (which are wisely being capped at the moment) and other government income maintenance. The Obama Administration recognized the need to do something about health costs, but probably failed to do so. It has shown no sign of giving up our adventures in Central Asia, and it only wants a relatively modest increase in taxes, confined to truly wealthy Americans. That, however, is almost certainly going to be impossible after the election, and it will have to choose between a tax hike for everyone--my preferred course--or no tax hike at all.

In Republicanland, however, orthodoxy holds that any tax hike is out of the question, as are, apparently, any cuts in Medicare or Social Security. (The elderly are for the moment a huge part of the Republican base.) The Republicans are saying nothing about the defense budget, or, indeed, about much of anything. In short, if in fact the Tea Party really is serious about anything except expressing their hatred of Barack Obama--which I doubt--they are probably in for a major disappointment. The Presidential commission on the deficit will report after the election and, I suspect, will make some of the same points that I just did. I very much doubt, however, that the new Congress will take appropriate action.


Bozon said...


Many thanks for this post.

Some questions which spring to mind reading this are:

What implications flow from a government budget deficit?

One implication is someone is loaning the money to finance it. We know some of those who are doing that. Big problem going forward. Another key implication of this big problem going forward is related to another critical 'deficit': the trade deficit.

Government debt itself finances foreign trade, which continues to drive the trade deficit and offshore production over domestic production.

Another key one, in my mind is, is: What are current tax revenues, and future ones, not being spent on? What it is being spent on, wastefully, you have touched on quite well in some detail.

Some of the things it is not being spent on are domestic economic autarkic promotion programs, including things like education at all levels (one of your recent topics), and programs to bring industrial, commercial, and economic activity back from abroad.

Some pundits talk about the need for tariffs, but isolated tariffs without some aggressive programs for redevelopmental import substitution, are pointless.

Then government borrowing to fund a budget deficit would at least come from domestic sources in greater proportion than now.

These are some issues and topics that spring to mind when we talk about budget deficits nowadays, it seems to me, apart from the 'numbers'.

all the best,

Anonymous said...

I should have thought that the lower interest rate payments (from 2.3% then to 1.3% now) on the debt would be a result of the Zero Interest Rate Policy of the Fed and not growth rates as you suggest. The Japanese cannot raise their interest rates ever again as the incredible 200% of GDP debt would crush them in interest rate payments. USA is going down the same road, losing interest rate adjustments as a policy mechanism. This blog entry focused on fiscal policy not monetary policy. The govt. is however mostly in stalemate and only willing to increase spending and only the Fed had any leeway to take bold actions but it is also only expansionary. The British example of late is quite dramatic, cutting spending 20% and firing 10% of govt. workers. USA can't do this as power is not concentrated enough in one set of hands in the parliament. Too strong checks and balances in USA. And besides USA is globalpower no. 1 with reserve currency status. It has to experience a monumental crash from position of hubris to force a change. QEII, Foreclosure crisis, recycling of trade deficits from China and petrostates to keep USA debt going is all very frightening. The Gignrich revoltuion will be repeated tos ome extent it seems with an equally centrist Democratic President to triangulate. By 2012 the second half of the crisi should be in full swing due to lack of alternatives in monetary or fiscal policy and possibly due to a Chinese real estate bubble burst and/ or a renewed oil/commodities price bubble. Obama can only win fi Palin or similar is the candidate under such circumstances. Otherwards perhasp a more moderate conservative senator or governor will take over and bury the wars. I can see little hope in the whole situation anyway. if every 6-12 months a new major crisi with Greeks or foreclosures or Chinese Real eState or Oil prices jsut keeps things FUBAR. You can't plan long term with such permanent crises in the pipeline.

Anonymous said...

Here's the recipe for reducing the deficits and expenditures!

Cuomo Vows Offensive Against Labor Unions


Anonymous said...

Columbus cleared of importing syphilis from America
after skeletons from two centuries earlier show signs
of disease


jo perry said...

What is the high cost of hiring mercenaries? I read in the book Blackwater that these contractors are asking for and receiving millions of dollars form the government.Why did we practically do away with our military and go to Blackwater? I understand from this book that it was wanted by Cheny and Rusmfeld and it has only gotten larger and larger. Now other contractors are involved. Soon our wars and maoybe even home defense will be covered by these trained mercenaries. I would like tohear fromyou about this . thank you jo perry

pbrower2a said...

Government should be having surpluses in good times and deficits in bad times. Anything else is folly. Deficits in recessions are inevitable, and efforts to curtail them during a recession do more harm than good. Herbert Hoover so demonstrated with his great failure.

We should have been taxing the Hell out of speculative profits in the last stages of the corrupt boom. Land flips do not create wealth.

Anonymous said...

Motivation? In the glory days of industry the highest marginal tax rate was so high that it made no sense for executives to pull out tens of millions of dollars in cash. They had to be willing to take their reward in the form of long term pensions that were often heavily invested in the industry the executives were overseeing and were made even more stable by combining their compensation with that of their employees. That ended when the top marginal tax rate got cut in half. Reagan himself put the nail in the coffin of the Midwest. Outsourcing adds big dollars to the bottom line quickly, executives take big cash payouts and simply walk away.

Anonymous said...

Surprising to me, is the general consensus,as to the" when and why" the economic decline began. Yes, now, the facets surfacing and rapidly growing do affect us, and are statistically criticable,(banking,healthcare,etc )but what one thing started it?
Without any question, societies demise began in the early nineties when a totally lawless, abusive entity slipped in... the internet
and HMOs. This is what needs qualifying.
Susan Albert

Anonymous said...

I am curious of the views of this blog since I believe the whole problem now is most American's do not trust their government to do the right thing with their money.

Social Security is a perfect example. Entitlement program that went wrong. We pay in the government gives the extra funds over and above what is paid out back to the US Treasury to pay for other debt we can not cover. Anybody else see a problem with this?

The American worker has only so many dollars to pay out to the Federal Government, State Government, County Government, City Government. After the American people pay all the taxes they are left with a paultry sum to exist on. We must change the tax system and how we view our government. They must start working for us not us working for them. We are not their ATM machines.