Deficits do not paint a complete picture of our current economic slump

With the current continuing resolution for government funding set to expire next week, Congress will once again spar over proposed budget cuts as Republicans attempt to confront our enormous Federal budget deficit.  Earlier this week, economics blogger Keith Hennessey published a timely reminder of an even more fundamental problem: Deficits Are an Important But Incomplete Metric.

You should read all of Hennessey’s post, but here is the heart of his argument.  For decades, US government spending has averaged approximately 20% of our annual GDP; sometimes a little more, sometimes a little less, but over time the average has stayed right around 20%.  Revenue receipts averaged around 18% of annual GDP, leaving an average annual deficit of around 2% of GDP.  During recessions, the percentage of spending and the size of the deficit trends upward; during prosperous times, the trend is slightly downward (the “balanced budget” years of 1998 – 2001 saw average government spending drop to around 18.5% of GDP). 


But starting in FY 2009, something drastic happened.  Government spending rocketed to 25% of GDP.  At the same time, owing to the severity of the recession, receipts were at an all-time low and the resulting deficit ballooned to 10% of GDP.  FY 2010 was a slight improvement, but projections for 2011 are once again in the 25 / 10 range. 

This represents a startling growth in the size of the Federal government in relation to the size of our economy — a 25% increase in the size of government, and a five-fold increase in the size of the annual deficit.

This is the difference that really matters.  Even if we succeed in balancing the budget, we are still looking at a drastic increase in the amount of money the Federal government pulls out of our economy, which is now 1 out of every 4 dollars, compared to the historic average of 1 out of every 5 dollars.

When the government takes a bigger share of our wealth, less is left behind for us.  I believe that this inconvenient truth, plus our current unsustainable debt levels (and the resultant uncertainty over interest rates) combined with the unprecedented increases in banking, finance, health care, and environmental regulations promulgated by the Obama administration, provides the most reasonable explanation for why our economy is still in the proverbial toilet.

Apparently the Democrats have no problem with this, nor do they have any interest in discussing it with the American people.

(If you’d like to do some data crunching yourself, the full set of spreadsheets from the Office of Management and Budget is available here.) 

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