Sunday, December 30, 2012

Champagne diet on a beer budget

I’ve been exchanging facebook comments with my friend Dave Snellen, who is a good, smart guy, a former Commodore of a sailing club I belong to, and at least as far over on the conservative side of the political spectrum as I am on the progressive side.  We were discussing whether the federal budget is like a family budget, and whether the current budget is has veered disastrously off-course due to Obama spending projects over the last four years.  He argued this way:

Like a family, it is fine for the government to borrow money IF it leads to an increase in GDP/income. Otherwise the interest on the debt just leads to increase outflow without a corresponding inflow…

Over the past four years, we've had an increase in debt of about $6B without a corresponding increase in GDP. Not good. No increase in income to pay off the new debt. So we have just added to our burden and need to borrow more. This trend cannot be sustained.”

He recognized that

“We are 'borrowing’ it from ourselves. The major purchaser of government bonds is the government.”

And concluded with

“The point being you cannot continue on a champagne diet with a beer budget.”

I thought his arguments were well stated, and they are widely shared over on his side of the political world---as a progressive, of course I have different views.  In fact, I seem to reach different conclusions even when I nod in agreement to many of his phrases, such as the last one about beer and budgets, and many of his facts.  I’ll use this blog post to try to state why.

First, I’ll at least brush the question of whether we can treat federal budgets as analogous to family budgets.  It would take its own long blog post to set out all the implications of this, and to show in any detail what mischief can be done by this analogy, so here I’ll just say that nations live much longer than families do, that they are organized completely differently, have different goals and purposes, that unlike families the money that national governments pay for goods and services is largely internal to the nation they govern, meaning that the money largely ends up in the hands of the nation’s own citizens and benefits them (which is part of the nation’s purpose), and finally that nations that control their own currency can’t go broke in terms of that currency. They, unlike families, can simply create money if they have to.  They might cause themselves a lot of economic misery by using that power too liberally at the wrong times, but they can do it, and families can’t. States can’t. Counties can’t. Cities can’t.  Businesses can’t. In our system, only the Federal Reserve has that power, delegated to it by Congress, and delegated to Congress by the Constitution.

But all of that doesn’t mean that I’m indifferent to national debt.  Contrary to Abba Lerner’s view on this, I think excessive debt does create possibly harsh limits for national governments, even for governments that control their own currencies and could, in theory, simply print money to pay their bills. If I thought that we were really on a champagne diet with a beer budget, I would agree with Dave completely on this---but I don't think either of those descriptions is right. 

Our revenue is low right now for two reasons: one, because while we emerged from the recession some time ago by the official definition, we are still in its dismal grip out here in the real world, and two, because we have been on a tax cutting binge for the last 30 years. 

The tax cutting was intentional.  As a nation we voted for it, or at least for the representation in Congress that enacted it, and the general opinion of a large segment of the voting population is still that we haven’t cut taxes far enough.  But whether you agree or disagree with that, the impact of those tax cuts is pretty clear.  Here’s a graph from the Federal Reserve Economic Data (FRED) web site, showing federal receipts from 1970 to July of 2012:


The blue line is total federal receipts presented as a natural log because changes in growth rates are easier to see that way.  The red dotted lines are mine.  They show the slopes of the lines from 1970 to 1980, then from 1980 through 2000, and from 2000 through the present.  The changing slopes are in part due to changes in tax policy.  It could, and should, be argued that they are also in part due to decreased overall economic growth rates---but I don’t think those who argue for low marginal tax rates want to depend on that argument.  It doesn’t lend a lot of support to the general philosophy that drove our move to lower tax rates and looser regulations, does it?  Those policies were supposed to increase economic growth.  There may be other, more basic reasons that growth has declined, and it may be sheer coincidence that the decline seems to coincide with the emergence of a new governing philosophy.  But at the very least, we can say that this data doesn’t add credibility to the new vision.

But the real force behind the current large deficits is, without question, the huge recession we are still slogging our way through.  Here’s a second graph from FRED, showing federal receipts and federal expenditures as a share of GDP from 1970 through July of 2012:

I know it looks like static, but slog through it with me for a minute.

The blue line shows federal government receipts as a percent of GDP, and the red line shows expenditures.  The gray vertical bars are the narrow official dates of recessions---and look what happens whenever there is a recession, no matter who is president or which party controls Congress: in or near every gray bar receipts decline and expenses rise.  In the mid-1970s we had a recession under Gerald Ford; look at the gap between expenses and receipts that quickly develops.  The gap gradually improves until the big recessions in the early 1980s under Ronald Reagan, which caused expenses to take off yet again, and revenues to collapse.  And look at this century: that big collapse of revenues from well above 20% of GDP in 2000 down to about 16% in 2004 resulted from both a recession early in Bush’s first term and from the impact of the Bush tax cuts.  The blue-line bulge after that was the housing boom, and the collapse in 2009 to less than 15% of GDP, from which we have not yet fully recovered, was the massive recession that began at the end of Bush’s second term. 

So it makes no sense to blame Obama, or any president, for the widening deficit that this massive recession, this Great Recession, caused.  In fact that collapse happened during 2008, before Obama took office.  In January of 2007 revenues were 19.2% of GDP; by January of 2008 they had dropped to 18.4%, and by January of 2009 they had dropped to 15.9% and were still on their way down.  Obama was inaugurated on January 20th of  2009.  By 2010 revenues were once again rising as a share of GDP, and by the middle of 2011 expenditures as a share of GDP were falling.

 So, with respect to the title of this post, even though federal receipts have declined as a share of GDP in this recession that doesn’t mean that we are necessarily on a long run beer budget.  The recession, eventually, will pass, and the budget constraints we are left with after that are those we choose to impose on ourselves.  We are the largest, wealthiest economy in the history of the planet, and since that’s true it’s more than passing strange to claim that we are forced to remain on a beer budget---if the United States budget is a beer budget, whose budget anywhere is not?  We can choose to spend less or more through our government; conservatives would prefer to spend less, and there’s nothing wrong with that as a choice.  But low taxes and low revenues are a choice, not a requirement for us.  We’re not constrained by national poverty to a small federal budget. 

As for the champagne diet, that has to refer to the size of the federal budget deficit as a share of GDP.  And it’s true that in January of 2007 the deficit was about 1.15% of GDP, and in January of 2011 it was over 8.6% of GDP.  From the FRED graphs above it’s clear that a large chunk of that deficit growth was a collapse of revenues that resulted from the recession.  Most of the rest of it, the increase in spending, is also a result of recession, rather than a result of Obama initiatives.  How do we know that?  Because in January of 2009, before Obama took office, the deficit as a percent of GDP was even higher: it was 10.1% of GDP.  That percent actually declined over Obama’s first term, and continues to fall.   There was a big jump in FY2009, which was the last Bush budget (ie, it was passed in 2008), and it included the bank bailout (Bush) and some fiscal stimulus (Obama).  But the trend since then has was pretty flat for a bit over a year, and then started to fall. There’s a belief on the right that Obama has been on a spending spree, but that simply isn’t true*.  We, as a nation, have had much smaller revenues and higher expenses because of the recession.  But there haven’t really been any great increases in federal profligacy in other areas.

As a last point, I do agree with Dave’s support of government investment in things that will increase economic growth.  That’s why, along with many others, I’ve been hoping that we could get support from both progressives and conservatives for providing stimulus by investing in infrastructure, particularly now when interest rates are close to zero, and real interest rates are actually negative. 


* For a discussion of this, go here. 

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