31 October 2015

The Truth About the Lie About Out of Control Deficits

Talking with a conservative friend the other day, he mentioned how unrealistic it was to think that the federal government can continue to borrow so much.
"It's not that different from the past," I said.
"40 cents of every dollar we spend is borrowed," he said.
"Ah. Well, yeah, at the height of the Great Recession that was probably right. The economy has recovered now and borrowing is about at a level that it has been for decades.

He sounded dubious.  And, the story that we have to slash government spending because it is out of control is a story that persists, like the notion that we had to bleed patients at a particular point in medical history.

So, here are the facts. (Federal receipts are mostly taxes.)

Average between 1980 and 2014, as a percentage of GDP
Federal Spending:   20.6%
Federal Receipts:    17.3%
Deficit:                      3.2%

(Note that spending as a percentage of GDP has averaged over 20% during the last 34 years. This might be a good time to point out that Ben Carson's plan to finance the federal government with 15% tax rate suggests cutting federal spending by over 25%, which he could almost get by completely eliminating either medicare, social security or the defense department. It's not impossible to lower federal spending that much but it won't happen. In fact, if you're convinced that he can do it, I'll bet you any amount up to a million that he won't. Seriously.)

In 2014,
Federal Spending:   20.3%
Federal Receipts:     17.5%
Deficit:                      2.8%

Last year, spending as a percentage of GDP was lower than its average since 1980 (a period that included the Clinton surpluses) and federal receipts were higher than their average. The result? In 2014, our deficit was lower than what it has averaged over the last 34 years, a time when the American economy has created 52 million jobs and increased GDP from $2.8 trillion to $17.2 trillion.

Oh, and if you go back another 20 years, to 1960, the averages don't change that much. In fact, federal receipts are still exactly 17.3% of GDP.. Government spending drops to 19.9% of GDP, which is not that surprising given this is a time that precedes the Vietnam War and Johnson's initiatives on social spending. The deficit as percentage of GDP in this period is 2.6% of GDP, not much different from last year's 2.8%.

Is it sustainable?

Bond markets continue to scoop up low-risk, low-return bonds that finance this debt. And voters continue to refuse to give up their social security or defense spending or to pay for them in real time. So yes, the debt is sustainable, as is the ability of politicians to alarm good people with talk of unsustainable debts. Like the Rolling Stones playing Satisfaction, this tune continues to get a great crowd response and will continue to be played by politicians who know better but hope that you don't.

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