2010.10.18
The deficit explained
As I’ve attempted to explain before, the surging deficits we’ve seen in the last several years are not, for the most part, caused by a sudden increase in government spending but by a sudden plunge in government revenue caused by the Great Recession.
Paul Krugman illustrates that with wonderful clarity in this chart:
Government spending is on the same trajectory as it was. Revenue fell off a cliff. The best way, in the short term, to bring the budget closer to balance, then, is to get the economy moving and get revenues flowing back into the federal government. Long-term, of course, something must be done about entitlement spending and health care costs.
Revenues were rising faster than spending until early 2007. What happened there?
Comment by Ed H — October 18, 2010 @ 5:48 pm
Dan..I have a question…Is this a fed gov only chart?
Comment by BUD — October 18, 2010 @ 7:00 pm
The chickens came home to roost. You cannot have this kind of unemployment numbers and gain tax revenue. Despite what the pawns of the rich tell you, the workers (and employers) paying all those payroll income taxes going down month after month, quarter after quarter has an impact on revenue. Sustained unemployment added to the financial house of cards crumbling was the end. It is starting to look like those jobs are not only not coming back, more will be going.
http://www.bls.gov/news.release/pdf/empsit.pdf
Comment by Sandi Saunders — October 18, 2010 @ 7:37 pm
I believe so.
Comment by Dan Radmacher — October 18, 2010 @ 8:04 pm
Revenues have fallen the last few years, but this chart only tells a partial story. Spending under Bush rose by over 100% in his 8 years and Obama seems to be determined to match or surpass that record. Revenues have no shot of keeping up with this torrid pace. Until and unless the spending issue is addressed even unprecedented increases in revenue will only mean the difference between a huge deficit and really big one. I look for it to continue regardless of elections (ask a republican what program they would cut and listen to the spin).
Comment by wilbert — October 18, 2010 @ 8:10 pm
I think “economist” Krugman’s chart illustrates a few things:
1 – Government revenue is being seriously impacted by unemployment (people who aren’t working aren’t paying income taxes) (and unemployment is closer to 22 per cent than the 9.6 per cent in the headlines);
2 – Government revenue is being seriously impacted by inflation; as more dollars are added to the economy, they are worth less; and
3 – The Federal government is spending money even faster than it is being inflated (put differently, without inflation, you would see a much steeper blue line).
Comment by 89Hoo — October 18, 2010 @ 10:42 pm
the graph shows 2 things:
1)While buisnesses do more with less, IN SOME AREAS gov does less with more.
2) As long as we don’t have any recessions our annual deficits will be “relatively small”.
EXACTLY!!
Comment by BUD — October 19, 2010 @ 7:05 am
Surely you and this economist must be correct because you are undoubtedly unbiased and spending, even at the torrid pace that the government has done it under Obama could not have anything to do with the increasing deficit.
I have to wonder if you really hear what you are saying sometimes.
The problem isn’t just deficit spending. If it how that stimulus was spent, for example. It was spent on government political projects and not on private sector (sustained) job growth. When the project is done, when the stimulus $ is gone, so is the job and therefore no net gain (and actually a net loss) to the taxpayer. You always took Republican opposition to the stimulus as obstinance but if you ever LISTENED to the arguments against it and the arguments against it were exactly because it wasn’t going to work. It was going to be government spending without job creation. That was why it was opposed.
Take the bank bailouts. The banks could have gotten their money all the same if it had been given to mortgage debtors who then would have paid it to the bank and paid off their mortgages. Banks would have gotten the money either way.
But government manipulation of how the $ is to be spent is the culprit here. Like the social security “trust fund” the government cannot keep its hands off of money or how it is to be spent.
Comment by Bob H — October 19, 2010 @ 7:17 am
Dan, why did you leave out the level of national debt??? Could it be that it’s at an all-time high? Could it be that debt as a % of GDP, which approaching 100%, has only been higher during WWII? Are we not still paying off debt from FDR, WWII, etc.?
One would think that since we have been in recession for a while, that Obama surely wouldn’t STILL be spending as usual? OK, there was the ineffective stimulus, but why on earth increase entitlements during the “Great Recession”? That’s exactly what he did. In addition, all of these wonderful entitlements are about to be technically insolvent again without an increase in our debt.
At what point will the country take the debt seriously? Doesn’t each administration have an incrementally bigger responsibility to halt the ever-new high debt accumulation? Or will they just kick it to the next administration 4 – 8 years later? Government only has an incentive to increase spending, not reduce it. This results in devaluation of the dollar, will increase the cost of borrowing in the long-run, and it leaves less money to save and invest in our country. This explains why gold is so high today.
Comment by Jim — October 19, 2010 @ 10:20 am
6. 89hoo The federal reserve is worried about deflation not inflation. Inflation is less than 1% and should remain so for the forseeable future unless the Fed can get it up to the 2% goal. If inflation should rise, the fed has numerous ways to combat it. The deficit is not the problem at this time, it is the slow growth of the economy. Too many people are trying to relate the economy to the 1980s and it is not the same. Deficits and inflation are not the problem.
Comment by Richard J Beason CPA — October 19, 2010 @ 2:01 pm
7. You can tell the government is doing less with more from this graph???
Comment by Richard J Beason CPA — October 19, 2010 @ 2:02 pm
8. Bob, the term was “Stimulus” not long term growth. The stimulus was meant to give the economy a jolt to stop its fall. It did just what it was supposed to do. It lowered taxes to help put more money in spenders hands, it saved thousands of teachers, police, and firemen’s and othe rstate worker’s jobs, it began work on infrastructure, it kept the auto companies from failing and started them back on the path to profits. It did just what it was designed to do.
Comment by Richard J Beason CPA — October 19, 2010 @ 2:04 pm
9. Jim, please see my previous response as to why the Stimulus was successful. As for spending now in a recession, please see the response to 89hoo concerning deflation. Lastly, it is critical to fix the economy today before worrying about the economy 4 yers from now. Growth today will fix the problems of tomorrow, but no growth today may mean we have much worse problems tomorrow. The Tea Party’s concern about the deficit is poorly timed, inappropriate in today’s economy, and certainly the wrong strategy for encouraging growth. Their publicity of fear of spending is exactly what our economy does not need.
Comment by Richard J Beason CPA — October 19, 2010 @ 2:09 pm
10 – Mr. Beason, re price deflation:
Generally, any reduction in prices we are seeing now is due to a combination of: 1) consumers making conscious efforts to save for that rainy day, for the tougher economic times they see coming; and 2) lending institutions being more stingy with the money they lend. Both of these factors are normal, healthy, market corrections that will increase the value of the currency. Left to their own momentum, and given a stable, commodity-based currency, prices and wages will self-correct and “right-size”. But Washington will not let that happen.
Of course, those normal, healthy market actions are going head-to-head with the inflationary practices of the federal government, which drives down the value of currency; they do this because they fear the normal, healthy market corrections (they openly discourage saving, and openly encourage risky lending practices). And the federal government is planning to inflate the currency even more, to completely counteract the healthy effects of saving and discretionary lending (they will call it quantitative easing).
And of course, we do not have a stable, commodity-based currency, we have one that is manipulated for political gain, backed by nothing of substance (see my previous paragraph). The Fed, banking institutions, and Washington have, through their actions of the last eighty years, put into motion the very conditions that are destroying the economy. They have, through, fractional-reserve banking practices, artificial manipulation of interest rates, and politically based regulation, inflated the money supply to the point that we are on the brink of a horrendous depression, hyperinflation, joblessness and a economic shambles.
Comment by 89Hoo — October 19, 2010 @ 2:47 pm
14. 89Hoo First off, we have until 2007 had the most stable economic growth known to modern man. The recessions have been extremely mild due to the Feds control of hte money supply. Second off, deflation is neither normal nor healthy. Please see japan since the mid 90s through today. They did not take action to prevent it and the second strongest economy in the world has since been crippled. Thirdly, please read the most recent announcements by the Fed concerning inflation, inflationary fears, and deflation. Remember, the Fed is non-political, current chairman was appointed by GW Bush, has typically been conservative in their moves, and have taken action to prevent a disaster due to the severity of th edownturn. FInally, the drop in the value of the dollar is a favorable thing, not disfavorable. The lower dollar is helping our trade deficit with China and helps compete with the rinmimbi whose value is controlled by the China Govt. This helps improve the US economy, not hurt. The inflation talk is irrational at this time. It willbe several years before there is an inflationary problem and the fed has numerous methods to control it.
Comment by Richard J Beason CPA — October 19, 2010 @ 4:10 pm
Krugman isn’t credible. He’s a shill.
Comment by T Witten — October 19, 2010 @ 4:31 pm
Question to you, Mr. Beason: what causes deflation? For that matter, what causes inflation? I think we may have differing opinions on that.
The Fed is anything BUT non-political, and your noting that he was appointed by Bush is hardly evidence to the contrary. Since there is precious little distinction in how the reps and dems govern, it should come as no surprise that he was initially overwhelmingly confirmed by reps and dems alike, and then again in January (he was confirmed which even at 70 per cent of the Senate, was the lowest ever). The Fed is entirely political.
Comment by 89Hoo — October 19, 2010 @ 4:41 pm
“a shill”, ROFLOL! Krugman is plenty credible. Some people just do not like what he says.
Comment by Sandi Saunders — October 19, 2010 @ 4:53 pm
16. For? His resume is pretty impressive. perhaps you would prefer a resume of Rush or Beck?
Comment by Richard J Beason CPA — October 19, 2010 @ 4:53 pm
Krugman’s a shill for the state. He absolutely despises private enterprise and the individual, but will promote anything that increases power in Washington. Republicans and Democrats alike love him.
Comment by 89Hoo — October 19, 2010 @ 5:11 pm
17. Deflation is the reduction of prices. The causes are not fully understood by even the best of economists, however, it is believed that a proloinged stagnant economy and unemployment forces businesses to lower prices to creat sales. As the public anticipates that prices may be lower in the future, they delay purchases both because of uncertainty in the future employment and because they are hoping for cheaper prices. Once this begins, it exponentially grows forcing down wages, product prices, and eventially become a spiral downward that ends in a repeat of 1930 or Japan in the last two decades. The reduction in value kills the capital market, stock prices, real estate, and commodities. Because we have only once had a deflationery period, we have little evidence as to how to stop and correct the spiral. FDR used spending and a War to help pull the economy out as well as creating gov’t jobs to put people to work to help with the mood of the Country as to outlook and with creating demand.
Inflation is the opposite, an increase in prices caused by demand. As people insist or receive increased wages due to demand and growth, they have more money to buy, the demand causes prices to rise. The Fed has that they can control inflation by adjusting the money supply, raising interest rates, or raising taxes to slow growth and capital. The Fed has been very successful up until 2007 in controling inflation and recession.
Comment by Richard J Beason CPA — October 19, 2010 @ 5:14 pm
17. The fed is apolitical. Many attempts have been made to exert political influence over the fed includig the Republican’s and some Demopcrat’s attempts this year. However, that is why their appointment is for a long period and why the founders of the Fed set the Central Bank as outside of politics.
Comment by Richard J Beason CPA — October 19, 2010 @ 5:16 pm
17. Perhaps if you had been in business from the 70s through the present, you would have experienced the many sides of inflation and its causes and the movements of the fed to control. Having done so, I can assure you the fed is very independent of politics. While they have little control over taxes as that is left to Congress, they do indepentently control the money supply and the interest rates and they do so no matter the political consequenses to Presidents or Congressmen. (See Geoge Bush Sr.)
Comment by Richard J Beason CPA — October 19, 2010 @ 5:21 pm
Mr Beason, what impact on prices (inflation or deflation) does the money supply have?
Comment by 89Hoo — October 19, 2010 @ 9:48 pm
24. 89Hoo, please call me Rick, Mr. Beason is too formal. As for the money supply, the fed has found increasing or decreasing the money supply has been beneficial in controlling inflation. Starting at the end of President Carter’s Administration with Volkler and continuing with Greenspan they found that raising or lowering interest rates and other methods of controlling money supply placed inflation under control and minimized recessions.
As for deflation, at present, the fed has been trying to get the same theory to work against deflation. Studies of Japan’s deflationery period concluded that not providing enough money supply early in their collapse caused the economy to go into a deflationery spiral. Their central bank did not recognise the problem soon enough leaving Japan to suffer two decades of deflation. The once second strongest economy has now fallen way down the list. Money supply should work in theory to increase growth. But, interest rates are at zero already forcing the fed to look at buying debt obligations as a means of increasing money supply. At the same time, However, other factors also consider into deflation. First, businesses and consumers have to believe things are getting better and begin to take risks of buying. Increased money supply helps lessen risks undertaken by business and consumers as does tax incentives passed by Congress. The idea is to correce businesses nad conumers into buying. Once the economy starts moving in a positive direction, then it grows exponentially just as moving in the wrong direction falls in such a way. The mood of the consumer and business is also important. That is where Obama has not been effective. He has not been able to handle the negative onslaught by the Tea Party and the Republican Party which has led to a lack of confidence. The Tea Party’s constant barrage against the Stimulus and calls for cuts in the deficit have been overpowering at a time when just the opposite action is called for. The mood from unemployment has harnessed the message as well and lack of Leadership in Congress by both parties have completely failed us. But back to your question on money supply, that remains the best means of deterring deflation.
Comment by Richard J Beason CPA — October 19, 2010 @ 11:45 pm
24. Just read your question again and realized my answer may not have completely answered. The changing money supply affects costs. For instance the reduced interest rate allows banks to loan money to businesses for less thereby encouraging the business to expand or simply lowering the businesses cost of capital. Thereby they can lower their prices to sell more product. From the consumer side, the lower interest rate does the same by saving the consumer money on borrowing. The more money put into the system, the lower the cost of capital, all other things remaining the same. However, as you know, all things are relative and the changing money supply also affects the value of currency. The feds money supply increase has lowered the value of the dollar which spurs exports by making US products cheaper overseas. It also raises the price of foreign products which encourages consumers to buy US products. As you have seen today, that has upset our foreign trade partners especially China which has accused of protectionism rather than free trade. (We have accused China of the same). Accordingly, China raised their interest rates today which is intended to slow their growth and raise the rinmimbi. This has also affected the US dollar whether by negotiation or by market as the dollar increased today. So money supply is a two edged sword in global economics and must be carefully balanced. That is the fed’s job.
Comment by Richard J Beason CPA — October 20, 2010 @ 12:02 am
Rick, to summarize your two-post answer, money supply has a direct impact on price inflation and deflation. In fact, the terms inflation and deflation refer specifically to the expansion or contraction of the money supply; the resultant increase or decrease in prices is precisely that – a result, an indicator, of the state of the money supply.
This happens because as more money is added to an economy, the money already in the economy loses value, which means it has less spending power, which means prices rise (price inflation). And conversely, as money is pulled from the economy, the remaining money increases in value, gains in spending power, and prices decrease (price deflation).
There are other things that influence prices, of course – the demand for a good, the supply of the good, etc. – but these are generally short-term impacts, and the supply of the currency itself has the biggest and most long-term impact on commodity prices.
If it were not so, the Fed would not be promising to increase the money supply (they call it quantitative easing) to offset the very healthy price deflation brought about by more saner lending practices and people saving their money.
That is what I mean by an easily manipulated money supply.
Comment by 89Hoo — October 20, 2010 @ 7:09 am
27. 89Hoo, except for the fact that it does not seem to be working in relation to deflation because the other factors seem to be holding it back.
You seem to believe deflation is a healthy thing. I beg you to read more about its affects. It would be devastation to our economy.
Comment by Richard J Beason CPA — October 20, 2010 @ 10:21 am
#12: The stimulus fails in the fact that it crowds out private investment and reduces spending owing to future tax liabilities. Now tax cuts would spur greater growth for us all, and I agree that now is not the time to complain about the lack of money for government spending as we need to reduce almost double digit unemployment and get GDP back to its long-run potential of 2.5%-3.0%.
Unfortunately, this administration failed the people and now’s the time to restore balance. I still believe the election of Obama was just a knee-jerk reaction that will be quickly righted in the next election.
Comment by Jim — October 20, 2010 @ 10:56 am
Market driven deflation – correcting the mistakes of a centrally managed economy – IS a good thing. I am well aware of the arguments, but they don’t hold water.
Take housing. The bubble was created entirely by those “managing” the economy. Regulations required banks to make risky loans; banks chose to make risky loans because a) they wanted a quick payoff and b) they new Uncle Sam would bail them out. All of this artificially increased the money in circulation and created an artificial demand, a cyclical process that built on itself. I call them artificial because the money was essentially created out of thin air (banks used the money belonging to other depositors, money secured by the government), and the demand would not have been there in a normal market environment. Put differently, without the government regulations and subsequent greed of the banks, people earning salaries of $30K would not be getting mortgages for $500K. The market would simply not support it. And of course, the artificial demand drove HOUSING prices up, artificially and ridiculously so. That is inflation due entirely to an increase in the money in circulation (i.e., the easy money).
Then the bubble burst, which was actually a natural and healthy market correction. Banks aren’t lending money as readily, people aren’t paying ridiculous prices for houses they cannot afford anyway…and prices are dropping – deflation. This IS entirely healthy. Yes some people are getting hurt, and that’s sad, but the solution is NOT to artificially prop things up, but to let the market return to sane levels. Those same people will wind up in a house they can afford.
Market-driven deflation is a healthy thing. To try to correct it by hyperinflating the currency will only create a bigger and more costly crash down the road.
Comment by 89Hoo — October 20, 2010 @ 10:57 am