11.18.10

Thoughts on the “deficit crisis”

Posted in Economics, General Musings, Politics and Policy at 11:15 am

Post-WWII (1946-2009) Average Federal Gov’t Spending and Receipts as a % of GDP:

Receipts: 17.8%
Spending: 19.6%

2007 Numbers:

Receipts: 18.5%
Spending: 19.6%

2009 Numbers:

Receipts: 14.8%
Spending: 24.7%

There were no significant tax policy changes between 2007 and 2009.  Nor were there any major spending policy changes apart from those incurred due to the financial and economic crisis.

The long-term historical budget gap has averaged around 1.8-1.9% of GDP.  Immediately prior to the crisis, it was right around, if not slightly below, the long term average.

The current budget gap of around 10% of GDP is due almost entirely to the financial crisis which caused a falloff in GDP (and thus, tax receipts) and the need for temporary emergency spending.  Eventually, receipts will rise and spending will fall as a result of pickup in GDP and the winding down of temporary emergency programs even if we take no deliberate action.  Adopting austerity measures to try and prematurely bring down spending and increase receipts will likely have the opposite effect.

There has been no significant increase in the “structural deficit” over the past 3 years.  While the Bush tax cuts and the 2 wars we’re fighting have obviously played some role in our budgetary position, they’re not the major drivers.  Democrats who say otherwise are lying.  Likewise, Obama hasn’t done anything to increase the structural deficit either.  Republicans who say otherwise are lying.  The entire “deficit crisis” meme is nonsense.  Long term, we do need to get Medicare costs (and healthcare costs in general) under control; short term, the focus needs to be 100% on economic growth and jobs, even if that means bigger deficits.

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