October 21, 2004
Deficits in Perspective
In previous posts I have complained about the lack of putting the magnitude of the deficits into context by the mainstream media. I thought a nice little graph that would put the deficits in perspective would be helpful at this point.
This first graph shows the top 25 worst deficits since 1940 as a percentage of GDP.
Notice that the 2004 deficit doesn't even make it into the top ten in this chart.
Now some might object that WWII years were an exception in that we were in a large scale war. Fair enough, lets remove the war years. The following graph shows the worst 19 deficits since the end of WWII (1945).
Now the 2004 deficit is the 8th worst deficit in the post war years.
Now some might be saying, "Okay, why put it in terms of percentage of GDP." Well think of it this way. Suppose your income is $20,000 a year and you have $2,000 in debt. Now a few years down the road you look at your debt and see that it is now $4,000. Has your debt doubled? Yes, in absolute terms it has. But is it a crisis? What if your income at the later date is $40,000. Suddenly the debt doesn't seem so bad. It is still 10% of your income. The income indicates your ability to service your debt. So long as your income can cover your debt payments and leave you enough for other expenses it is not necessarily "bad". Further, debt can also be a good thing. I am in far more debt than my income. The debt levels for my household are actually larger than my income. The reason for this is because I own a home and have a mortgage. Is this bad? Most people would say, "No."
So what have we established so far. First, that the current deficit isn't necessarily the worst, at least in terms of the most meaningful measures. Second, that debt isn't necessarily bad provided one can service the debt and also depending on why ther is debt. So why is the U.S. government running a deficit again? There are three reasons (not in any particular order of importance or magnitude).
- The recession,
- increased spending,
- tax cuts.
All three contributed to the increase in the debt. Further, all of this does not mean any of the following:
- There is no deficit,
- The increase in the deficit is nothing to be concerned about,
- The deficit should be higher.
For completeness I am including a graph of the last 25 years of deficits and surpluses [Note: The deficits were initially negatives, I converted them to positive values in all three charts for consistency, this has the unfortunate result of turning surpluses negative. Also, out of laziness I used total receipts and outlays which shows a small surplus for 2001, using only on budget receipts and outlays 2001 ran a deficit].
Update: There was some strange error in the second chart that has now been fixed. Somehow the years did not line up with the right bar so 2004 ended up coming in last.
Also, in comments yportne asks the following questions:
Are these the true deficits or are there other off budget items? Is there an additional problem due to the cumulative nature of multiple deficits? For the purposes of this string should Viet Nam be treated like WWII?
Regarding the issue of on-budget vs. off budget. I am using data that is noted as being total reciepts and total outlays. There are an on-budget columns for receipts and outlays, but no columns explicitly marked as off-budget. My guess is that the total is both off and on-budget. I do know the total columns are larger in both receipts and outlays.
As for the cumulative nature of deficits that is the debt. Each years deficit adds to the national debt. Graphs could be generated showing a time series for the national debt. As for what the national debt's implcations are for growth, interest rates, and other things of economic interest that is open to considerable debate.
As for looking at other wars such as Vietnam, there is that. One could graph all years from say 1940 to present and then perhaps shade the regions during wars and provide a visual aid for looking to see if spending is positively correlated with wars. My guess is that it is. Thus, the war on terror and Iraq would be two more additionaly variable explaining why we have seen deficits grow so much in the last few years.
Update II: Victor over at Dead Parrots has a very nice post on this as well, also with a good graph that puts the unified and on-budger deficits(surpluses) side by side. Check it out.
Posted by Steve at October 21, 2004 09:58 AMGreat post.
Posted by: Todd on October 21, 2004 11:06 AMYeah, but what are the 10-year projections of deficit?
Just kidding. I'd prefer that you stick with figures that actually mean something.
Posted by: Slartibartfast on October 21, 2004 11:17 AMAre these the true deficits or are there other off budget items? Is there an additional problem due to the cumulative nature of multiple deficits? For the purposes of this string should Viet Nam be treated like WWII?
Posted by: yportne on October 21, 2004 11:57 AMConsideration of the Deficits can be approached from many directions. Your method compared GDP percentages which highlights the ability of taxation to eliminate the debt. An actual 3% overall increase of all tax rates would eliminate the Deficits. This only if Spending is capped. How likely it this now? How likely is such an increase in the next fiscal year?
The Government Deficit is interacting with the Trade Deficit, so that the Government is actually exporting Dollar Inflation. Foreign conscription of American Public debt, though, is decreasing. It will cease to subcribe the Government Deficit by June, if the rate of decline is maintained. The Government Deficit will have to disappear at this time, or vastly increase the devaluation of the Dollar which is going to occur. lgl
Posted by: lgl on October 21, 2004 12:41 PMi appreciate your work! nicely done!
Posted by: tony on October 21, 2004 01:37 PMThank you for laying this out, to show the relative sizes of the deficit in real terms through the years. Interesting information.
Your last chart could be thought to show deficits of remarkably low size as a percentage of gdp, i.e., in the range of between .01 PERCENT and .06 PERCENT. In context, it's relatively clear that you do not mean .01% or .06%, but rather 1% and 6%, respectively, but for clarity, if you keep the legend of the axis the same, you ought to drop the decimal places, and follow instead what you did in the prior charts.
Do you really mean to say that the deficits since we have been in recovery (late '01, I guess) are due in part to the recession, STILL? Hasn't that effect been gone for a while now? If not, about how much is it claimed that bad economic activity performance is reducing revenues, and with growth decent enough, it would seem, who claims it, and why?
Eyeballing the chart, it looks like we went from a 2% of gdp surplus to about a 5% of gdp deficit, a 7% of gdp turnaround. That would seem to be unprecedented. Is it?
Posted by: sofla on October 21, 2004 01:39 PMSofla,
The last charts y-axis has been reformated so it is now correct.
As for recessions and deficits I think you'll see a positive correlation if you were to download relevant data and do the appropriate analysis. So in a sense yes, recessions do affect the size of the deficit, and with a small surplus a recession could lead to a small deficit. As for the lengthe of the impact don't you think it would be somewhat correlated with unemployment/employment. Look at the deficits in 1990, 1991, and 1992. One could argue that that recession had a fairly long lasting impact on the deficit. The latest recessions effects might last even longer given the continuing weakness in the labor market.
As for the unprecedentedness of the increase, it is pretty steep, but it has happened before.
Posted by: Steve on October 21, 2004 02:27 PMSensible. But the idea that Bush is suddenly going to get religion on the budget issue is garbage. He has NEVER vetoed a bill. NEVER. The Republicans can't seem to control themselves in the candy jar.
Posted by: Rob W on October 21, 2004 04:31 PMRob,
I don't think I suggested that Bush will "get religion". In fact, I've noted that if the budget is a big, big deal to you and you are on the right, then voting for Kerry (with a Repub House and Senate) is probably the way to go.
Posted by: Steve on October 21, 2004 04:38 PMwow! bet you kinda feel like a douche.
swallow hard sometimes pride doesnt go down so easy
Posted by: jay on October 21, 2004 08:47 PMAccording to the Bureau of the Public Debt, the public debt has risen every fiscal year since 9/30/1987. Why did it rise during the years of surplus? Should it not decrease when there is a surplus? During the year ending 9/30/2004 it increased almost $600 billion. This was the largest increase of any year since 1987. The US public debt is now over $7.4 trillion.
Posted by: yportne on October 21, 2004 10:16 PMFinally someone who understands this. I took a class in college that dealt with governmental finance, and since, have tried to explain this concept to many people, only to get chopped up.
Well done, and well explained. I remember my professor explained it the same way you did with the annual income and debt, just brought back some fond memories.
Of course I also linked your ass.
http://www.littlebigmind.com/weblog/lpm/index.html
I don't think I suggested that Bush will "get religion".
I have a theory, and since I know that will have everyone hanging on the edge of their seats I'll waste no more time in getting to it: I think Bush will be a hard right budget slasher in his second term. That will allow the next Repub to run as a compassionate conservative.
It's a shame I think the electorate that gullible, but 4 years is a long time for them.
Posted by: Ron on October 22, 2004 07:03 AMI note from the TrackBack that the 2004 deficit was about $415 billion but that the debt increased almost $600 billion. Is there a simple explanation for this difference?
Posted by: yportne on October 22, 2004 04:08 PMAccording to the Bureau of the Public Debt, the public debt has risen every fiscal year since 9/30/1987. Why did it rise during the years of surplus? Should it not decrease when there is a surplus? During the year ending 9/30/2004 it increased almost $600 billion. This was the largest increase of any year since 1987. The US public debt is now over $7.4 trillion.
Restricting to on-budget only, the fiscal year 1999-2000 was the closest that the US came to breaking even. As I recall, it fell just a billion short.
Steve, could you do another set of graphs showing the national debt vs. the GNP? Or could you refer me to a site that has graphs like that? How does the U.S. debt/GNP ratio compare to other industrialized (and I'm thinking European) countries?
Posted by: Karl on November 3, 2004 06:51 PM