["The truth when comparing Presidents, lies in 'Federal Outlays' not 'Combined Fed, State, Local' as the author chose."]
You might have missed the second chart in the original article.
Also, public expenditures cannot be seen in isolation from the state of the economy:
The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis, an assertion belied both by the low interest rates at which the Feds can borrow and by the fact that medium-term deficit projections really aren’t that alarming. Another is the notion that our current deficit is driven by a surge in government spending.
I’ve written on various occasions about that latter point, but we’re further along in the business cycle now, so it’s time for an update.
The crucial thing to understand here is that you do need to take the state of the business cycle into account; it’s not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery.
Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. Suppose that you have commitments to defense, to Social Security, to Medicare that are growing at rates consistent with the long-run growth in the economy; if the economy plunges and then takes a long time to get back to trend, those spending programs will temporarily account for a larger share of GDP, even if there hasn’t been any acceleration in their growth.
Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don’t want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.
So how can we get a better picture? First, express spending as a share of potential rather than actual GDP; we can use the CBO estimates of potential for that purpose. Second, keep your eye on the business cycle — and, in particular, on how spending is evolving now that a gradual recovery is underway.
So, let’s look first at a longish time series of total government spending as a share of potential GDP:
Ratio of government spending to potential GDP.
What you see is not a sustained upward trend: there’s actually a considerable fall during the Clinton years, reflecting in part falling defense spending, then a more modest rise in the Bush years, mainly reflecting spending on the War on Terror ™, and finally a temporary surge associated with the financial crisis — but much of that surge has already been reversed.
Here’s a closeup on Bush’s last two years and Obama’s first four:
That was the spending surge that was.
Now, there’s still stuff out there that will, under current law, lead to rising spending: mainly an aging population plus rising health care costs. And some of that is already affecting spending trends. But the idea that we’ve had some kind of spending surge, and that current deficits reflect that surge, is just wrong, and distorts public discussion.
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Or, in case you find Krugman unpalatable:
By Evan Soltas Dec 26, 2012 10:57 PM GMT+0100
If those so-called deficit hawks would stop moralizing long enough to look at the data, they might find something surprising: That data almost entirely undermine their argument.
Yes, the long-run path of spending on federal health programs remains a serious and legitimate source of concern. But the numbers show that our current fiscal deficit is well within control -- as have been the deficits of the last five years.
Sources: Office of Management and Budget, Congressional Budget Office and author's calculations
Sources: Office of Management and Budget, Congressional Budget Office and author's calculations
The right way to evaluate the U.S.'s current fiscal condition is not to look at at its budget deficit, which fluctuates sharply due to economic conditions. Rather, it is to calculate the structural budget deficit, the difference between government spending and revenues when the economy is normal. (More technically, it is when the "output gap," the difference between actual and long-run potential economic output, is zero.)
For this post, I have calculated estimates of the current structural fiscal deficit from 1949 to 2012 with data from the Office of Management and Budget.These estimates come from breaking down the deficit into its components -- spending by individual program and revenues from each tax -- and computing their sensitivity to the output gap over time through linear regression. My estimates of the output gap come from the Congressional Budget Office.
For fiscal year 2012, the annual structural deficit was $325 billion, or 2.1 percent of GDP. (See the first graph accompanying this post.)
That is worse than no structural deficit at all. But it is hardly unsustainable. The U.S. economy is capable of growing at that pace over thelong run, which means that the ratio of debt to GDP, a key measure of sustainability, will be stable. The weak economy explains the remaining $1 trillion of the deficit, which amounts to 6.5 percent of GDP.
My calculations suggest that federal taxes would bring in revenue of 18.2 percent of GDP, and federal spending would amount to 20.3 percent ofGDP, given an average economy. That compares to current tax revenue of 15.9percent of GDP and spending at 24.5 percent of GDP. (See the second graph with this post.)
It is likely that these figures overstate the size of the structural deficit in 2012. The OMB projections I use in my analysis appear tohave significantly overestimated the amount of spending, and underestimated the amount of tax revenues, in the 2012 fiscal year. So it is possible that the structural deficit is closer to 1.5 percent of GDP.
These calculations are never more than approximations, but theygive a strong indication of when changes in the deficit are cyclical and when they are structural. For example, spending on unemployment insurance is highlycyclical, whereas spending on veterans' health and Social Security payments are mostly structural. Not all changes in spending and tax revenues are createdequal, in other words, and looking at the deficit on a program-by-program, tax-by-tax basis allows a much more accurate structural estimate. (Here are my data and calculations.)
All of these calculations are robust to different specifications -- that is, no matter what assumptions I made, I came up with approximately the same numbers. The figures presented in this post are averages of the different specifications tested.
Paul Krugman came up with similar back-of-the-napkin estimates in a recent column, "That Terrible Trillion." These detailed calculations confirm Krugman's observation. They are also a follow-up on a 2009 report from the CBO that used similar methods.
My figures, however, assign significantly more of the swings in revenues and spending from the Clinton administration onward to cyclical rather than structural factors. Income tax revenues, for example, have become more cyclically volatile as the burden has shifted in recent years toward high earners, whose incomes are less stable. Like mine, however, the CBO's analysis also attributes a large component of recent budget deficits to cyclical factors.
None of this is to say that the long-run budget picture is sustainable. In fact, it plainly is not, as the federal government faces a severe challenge of financing the large and growing cost of its health programs. But the U.S.'s budget problem is not as dire as the budget numbers would imply at first glance.
Fiscal policymakers need not think about fixing deficits in the short run. The cyclical deficit will take care of itself as the economy recovers. Instead, they should seek to contain long-run pressures on the structural budget deficit. The ideal solution would plot a path to reduce the structural deficit over a decade through increases in tax revenue and cuts to spending.
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