Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Friday, March 11, 2011

Federal Budget and the Great Stagnation

I've already posted on Government spending and the great stagnation.  Here's a deeper look at both sides of the ledger.

This is important because one of the current BIG LIES is that we have runaway - or a least unsustainable - spending, causing a serious budget problem for the country.  As I have previously concluded - and Karl Smith also states (my emphasis): "I want to make the more general point that spending is pretty much never the cause of budget deficits. Or, to be a bit more formal, variations in spending do not predict variations in the deficit. Variations in tax revenue, however, do predict variations in the deficit."

Here's a look at revenues and expenses, on a log scale, from 1950 on.

I've added a couple trend lines, for the post-1980 period.  They are essentially parallel, (log scale slopes are 0.0526 for revenues and 0.520 for expenses) but as we will see, this is misleading.  Also note, these slopes are lower than those for the pre-1980 period.

By my calculations, the compounded annual growth rates are:

1950-1980                                1980-2010
Revenues   8.9567%            4.885%
Expenses   9.1652%             6.065%

Pre-1980 growth on the order of 9% is pretty hefty; but note how revenues and expenses grew together at similar rates over a period of thirty years, and for most of that time, the two lines were tightly packed.  Since then - in the era of all deficits, all the time - spending growth has reduced substantially - and revenue growth even more so.  This is the set of domestic twin fallacies of small government and inadequate taxation, coupled with the foreign policy fallacy of imperialist expansion.

Digging deeper, these numbers suggest something mysterious.  How can the two substantially different growth rates for the post-1980 era yield data sets with parallel trend lines?  Well, I'm only an amateur mathematician, but here's my guess.  The parallel trend lines are an accidental data artifact.  The two lines are quite different at the detail level, often proceeding in contrary motion from one year to the next. Plus, the best fit considers the entire data set, while the compounded growth is based only on the end points.  The 2009 and -10 data points are pretty far off the trend lines.  Let's zoom in on the latest couple of decades.

At this scale, the shorter period trend lines are no longer parallel.  Spending growth, though less than that for the entire post-1980 period, is far greater than revenue growth.  Notice in particular that during the Clinton administration, spending moved slightly below trend, while revenues moved far above.  Of course, the opposite has been true since.  And, to revisit Karl's point, spending growth has been close to steady, while revenue growth is quite erratic. 

Here's the same picture with Clinton broken out from the Shrubs.  Trend lines are for Clinton and Dubya + his economic clone B. Hoover Obama.  Clinton had much higher and more consistent revenue growth, as well as much lower and more consistent spending growth.

But again, a trend line can be misleading when the underlying data is erratic - as in the case of revenues post-Clinton, which have slumped badly over the last three years.

Just for the sake of completion, here is a look at 1950 to 1980.

For most of this period, revenues and expenses matched very well.  At some time we went from responsible fiscal management to all deficits, all the time.   You can pick any of several starting points: 1971, 1975, and 1982 are all reasonable.

I'm not going to say that expenses aren't relevant.  However, it's clear that revenue shortfall is the big contributor to budget problems - now, and always.  It's also clear that this problem has been foisted on us by decades of Rethug mis-governance.

But nobody is willing to face these facts and address the issue with the only sensible solution - raising taxes on the rich.

So -- we are very badly screwed.

1 comment:

BadTux said...

The fact of the matter is that we have an overall level of taxation as a percentage of GDP today that is identical to 1950, but far more governmental responsibilities to fund with that level of taxation. The American people want a free lunch -- they want their Medicare, they want their Medicaid, they want their airport security, they want their Interstate highways, but they don't want to pay for it. Well there is no free lunch. And the people are going to get what they pay for, eventually... which is far less than they demand and expect. But they do so want to believe there's a magic Budget Fairy so that they don't have to pay taxes to pay for what they want...

Oh yeah, like you said: WASF.

- Badtux the Waddling Penguin