Why the US Budget Deficit is Not the Biggest Issue.

The US budget deficit has been for several years relentlessly in the public’s eye. But is this focus really warranted?

Globally, we face many major long term challenges. The US budget deficit is not only not one of them but is distracting public consideration, focus, and problem-solving away from the far more critical issues of sustainability. The subject of the US budget deficit is also unfortunately submerged in a remarkable amount of rhetoric, misinformation and, frankly, what quite often feels like intentionally misleading information. We’ll look at deficits, outlays and receipts to get a better understanding.

 

What’s the history?

Let’s first examine the history in an effort to establish a bit of perspective. We’ll start with some figures from the US Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) and later look at some of the causes of the deficit. Figures after 2012 are projections by the OMB. Let’s start with figures as a percent of US Gross Domestic Product (GDP).

(You may download the official OMB Historical Tables data Here.)

 

US Budget Deficit as Percent of GDP

Figure 1. Source US OMB Historical Tables Page, linked in References below.

 

Deficits

First let’s note that we have been running deficits for a long time with brief periods of surpluses as shown by the bottom curve in the figure above. Deficits were low and decreasing very slightly under President Carter, increasing and several times higher under Reagan and Bush, decreasing and solidly into the surplus range under Clinton, increasing again under Bush, and, on balance, decreasing again under Obama.

 

Outlays

The top curve shows outlays, the slope of which has been substantially negative only under the Clinton and Obama administrations. Most recently we have seen sharp increases starting near the end of the last Bush administration followed by moderating modestly under Obama.

 

Receipts

Starting early in the Reagan administration and continuing through the first Bush administration we saw receipts dropping due primarily to tax-decrease policies that were restarted under the second Bush administration. Most significantly, during the later part of the second Bush administration we saw receipts dropping dramatically as the latest recession took over. Now let’s look at the same data in terms of dollars (adjusted to 2005 dollar values).

 

US Budget Deficit in Dollars

Figure 2. Source US OMB Historical Tables Page, linked in References below.

 

Note that the general upward trend in terms of dollars is expected as the population and the economy of the US generally grows over the long-term. We can also see, over the 12-year Reagan/Bush period, persistent deficits that can only be attributed to policy decisions since the economy was doing generally well during this period. Policy appears to reverse under Clinton then revert back under the second Bush administration only to revert back toward more fiscally “conservative” under Obama. It is notable that under the second Bush adminsitration the gap between outlays and receipts was beginning to moderate – but then came the recession.

 

Recession Dynamics

Now, in a recession several things are happening (and should happen) at once that strongly tend toward deficits. First, receipts fall through the floor as unemployment and lower corporate profits result in a lower tax base. Second, claims on unemployment funds and government support increase. Third, as well-proven by history, governments “should” inject stimulus to accelerate economic recovery. I use the word “should” advisedly since apparently the economic learning that has been persistently available and repeatedly proven since the Great Depression seems to have been somehow forgotten (conveniently or not) in certain quarters.

 

Silver Lining?

Before we leave this aspect of the discussion, let’s note the silver lining to the long history of running up the debt by various historical administrations. Despite the gnashing of teeth by certain interested television commentators, the deficit is, in fact, (drum roll, please)  shrinking!

From Investors.com:

“Believe it or not, the federal deficit has fallen faster over the past three years than it has in any such stretch since demobilization from World War II.

If U.S. history offers any guide, we are already testing the speed limits of a fiscal consolidation that doesn’t risk backfiring. That’s why the best way to address the fiscal cliff likely is to postpone it.

While long-term deficit reduction is important and deficits remain very large by historical standards, the reality is that the government already has its foot on the brakes.”   – Jed Graham, Investors Business Daily

 

How big is the debt?

So, “How big is the debt problem we currently face and how does this compare historically?” The chart below from zFacts gives a bit of historical perspective:

 

History of the US Debt

Figure 3. The US debt has been considerably higher than it is now, and history shows that it has been paid down by administrations following responsible fiscal policies. Most recently Democratic presidents have reduced the debt while Republican administrations have dramatically increased it. The facts of this matter are quite contrary to public perceptions. Source: Research by Steven Stofts.

 

What should be apparent from the chart above is that the debt is indeed “high” but is not unprecedented. It should also be apparent from looking back to the period near the end of the Carter administrations that deficit problems are manageable with strong policy and, conversely, can become challenging over time in the face of poor policy.

 

Where did it come from?

But aren’t we hearing a lot about out of control ballooning government size? The following chart shows government size in recent history, both in terms of number of people in absolute terms and as a percent of the US population.

 

Causes of the US National Debt

Figure 4. The recent causes of the increase in US national debt have been largely related to the Great Recession via less tax revenue, increased demands on Social Security and unemployment insurance resources, and, to lesser extents, to bank bailout spending, economic stimulus spending and increased military spending. Source: Research by Steven Stofts.

 

Well, as the chart above shows, government, in terms of number of employees, grew significantly under the Reagan administration and then peaked under the first Bush administration.  The temporary spike under the Obama administration is attributed largely to temporary census workers. Government size has, on balance been declining for quite a long time both in absolute terms and in terms of percent of population.

If it is not the government size, then what is the cause of the debt? Next let’s look let’s at the primary recent sources of debt.

We can see clearly several major sources; lower tax revenue (as a result of tax cuts and reduced tax base due to recession), more claims on government resources during periods of high unemployment, military spending increases due to the Iraq and Afghanistan wars, and TARP and stimulus spending.

The following infographic is based on the Congressional Budget Office (CBO) data.

 

Figure 5. Source: US Congressional Budget Office (CBO), linked in References below.

 

Okay, are the facts all clear now?

 

Summary

The first order effects causing the US budget deficit have been tax reductions compounded by recession effects further reducing receipts and increasing claims. It should be manifestly clear that these effects are quite easily reversible. The problem of course is that when the recession started, we were in a very significant hole caused by past administrative policies.

But, to sharply reverse previous Republican policies at this point in time while we are still in a deep recession, by most accounts of credible economists, will worsen the recession. Worsening the recession, as we have seen, will very likely further decrease government receipts and increase claims for government support by those experiencing economic hardship.

This is of course contrary to the goals of reducing debt. Instead, what is argued by Paul Krugman and other economists, is that we need to focus first and foremost on fixing the economy through policy and, specifically, increased stimulus spending. If successful, this will of course create a solid foundation of increased revenue and decreased support payments as unemployment decreases and unemployed workers re-enter the workforce. Policies contrary to this advice, widely referred to as austerity, have been tried extensively in Europe under conditions similar to those in the US with nothing short of disastrous economic consequences including, especially, worsening recession.

As was demonstrated during the Clinton administration, the deficit is imminently solvable in a quite straightforward manner, especially after we get our economy right-side up.

 

Conclusion

Frankly we have much bigger concerns related to increasing demands on our planet’s natural resources that need our attention. More about those issues in future posts…

 

 Learn More Here: http://greenplug.nu/category/learning-center/us-economy/

 

Tracy Crawford

CEO | Rain8 Group

References:

http://news.investors.com/blogs-capital-hill/112012-634082-federal-deficit-falling-fastest-since-world-war-ii.htm

Congressional Budget Office

US Office of Management and Budget – Historical Tables 

Steven Stofts’s zFacts

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