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Tuesday, February 23, 2010

Inflation and Deficits

Here is a graph of inflation and deficits as a percentage of GDP, from 1951 through 2009.  Deficits can be presented a lot of different ways: current dollars, constant dollars, per capita, or as a GDP percentage.  The latter is convenient here, since the percentage data can be graphed with inflation using a single scale.


Inflation is indicated by the top line, deficits (and the occasional surplus) by the bottom line. Red and blue indicate the party of the president, blue for Dem, red for Rep.

In a broad-brush way, the era of high inflation corresponds with the Reagan era of high deficits.  This seems intuitively obvious, but at a detail level, the opposite picture emerges.  Until the beginning of Clinton's first term, increasing inflation corresponded with a smaller deficit in a given year, while lower inflation corresponded with a bigger deficit in that year.  The yellow arrows indicate some of this.

Clinton gave us continuously decreasing deficits, and finally 4 years of surpluses, including 2001.  (It took Bush a few months to derail the economy.  His first year reversed the increasing surplus trend.  Deficits followed.)

The large deficits under Bush did not correspond to high inflation.  I attribute this to powerful secular deflationary forces that countered the inflationary thrust of the deficits.  My fear is that the deflationary trend is now so powerful that the economy will be swamped in the absence of decisive action.  This, of course, is not likely to be forthcoming.  President B. Hoover Obama is too conservative to seriously mount a New Deal style initiative, and the American population, after decades of lies and stupidity put forth by Repugnicants and Reich-Fluegel talk show hosts, is too damned ignorant to understand that this is exactly the economic environment for aggressive Keynesianism.

Bottom Line:  Se are SO screwed.

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Inflation data from The Inflation Data Website
Budget data from the GPO

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7 comments:

J said...

Clinton....including 2001.

You point out another problem of relating economics to politics, jzb: ie the time lag issue. When do the Admin. policies affect the market, and make the charts rise or fall? I don't think one should assume that a tax raise, or tax cut produces immediate results, though many armchair economists think so--and also tend to identify certain trends as "good" or bad. that said, I'm in agreement that however f-ed up Clinton and Reagan were, Bush II outdid 'em in terms of scorched earth economic policies--like greatly increasing military spending, and deficit while at the same time cutting taxes (tho' BHO has done little to rectify...)

Your discussion of GDP hinted at that as well: a rise in GDP might seem good, but often correlates with inflation. For that matter, the very definition of inflation has problems: are higher prices the result of more currency, or vice versa? Even the economic experts don't always agree--and really, inflation could be good for some (ie. businesses that move a lot of product, and demands stays stable, so they raise prices, make more shekels, etc). Econ.'s an odd study: more like a collection of rules of thumb, not really an empirical science.

Regards,

J.

Jazzbumpa said...

J -

All valid questions.

That's why, when I started graphing this stuff, I was amazed to find consistent Dem superiority by almost any measure. It's in the aggregate these data show that Repugs are all wrong, all the time.

Inflation/deflation relate to changes of the quantity of money in circulation. Clearly, that's down now because banks aren't lending, companies are sitting on piles of cash, and people aren't earning.

Price changes are resultants, not direct measures. Unfortunately, the graph is based on CPI-U, which is the first thing I found.

Whether inflation is good or not is a matter of degree. It's like a vital nutrient that becomes toxic above its prescribed dosage, which seems to be in the 2 to 4% range.

Deflation, OTOH, is always bad - like a vitamin deficiency. The economy gets scurvy and rickets.

At least part of the difficulty of Econ is that it's non-linear. Deficits are not always bad. Surpluses are not always good.

If the Treasury printed a Trillion dollars tomorrow, the inflationary effect would be nil. That would not have been true in 1997.

Cheers!
JzB the non-linear trombonist

CJ said...

I wish I understood economics better. Now that I'm retired, maybe I can find a community college "economics for dummies" course (free for those over 62.) I'm a very visual person, so your graphs help. Several years ago, "The Nation" had a great graph showing that the economy has traditionally done well when the gap between the wealthiest and poorest Americans is small. When there is a wide gap (such as those created by tax cuts for the rich) the economy goes into the toilet.

I thought after W's performance, we would hear the end of accusations making the Democrats responsible for every economic problem that ever existed, especially since the GOP certainly spent more than their share from 2001-09, but no, they're still at it.

Yeah! We're screwed.

Jazzbumpa said...

CJ -

One thing that is obvious is that the right wing is totally disconnected from reality. You can scroll down the right hand side of the blog page to Labels, and pick "Deep Stupid" or "Republican = Wrong" to get many of the highlights. OR lowlights, I guess.

Dems aren't much better, but Repugs are always worse.

J said...
This comment has been removed by the author.
J said...

I don't think Republicans are stupid per se (well, some dixie redneck repugs might be...). The wealthy simply want to stay wealthy. So the party of the wealthy, ie the GOP (though certainly some rich Demos as well) implements policies to insure that they keep their wealth (and thus oppose tax raises, or programs for the 'po. etc) .

The US political system has been set up to protect certain vested interests (proprety for one) from the start, ala the Constitution. In a sense, when the typical liberal complains about greedy rich repugs, he's implying the problems are systemic. Ultimately, the problems of capitalism and economic distribution are related to the problems of democracy (including voting), and the political structure itself, if not psychology (what if, as some data suggests, large numbers of humans are psychotic to some degree or another? they will likely have a psychotic system).

Jazzbumpa said...

I'll have a post some day about who are conservatives: The rich, for selfish, short-sighted reasons, the ignorant, because they don't know any better, the crazy, because they're crazy, and the stupid because they're stupid.

Conservatism is always repressive, regressive, relatively unconcerned with human rights, cynical about human nature, distrustful of progress and democracy, negative, pessimistic, greedy and venial.

Today's right wing isn't just all of this on steroids. It's also uninformed, prideful in its ignorance, delusional, dishonest, mean-spirited, and impractical.

Help if I've forgotten anything.

Have a meeting in a half hour. Gotta Run.

Cheers!
JzB the non-conservative trombonist.