Federal Receipts and Outlays Divided by National Income

In Economy on April 16, 2012 at 1:31 AM

Federal receipts and outlays divided by national income. What is the U.S. plot line and summary story judging from the available data? Here are the compiled statistics, courtesy of the FRED storehouse, as lodged on-line and provided by the Federal Reserve Bank of St. Louis. Captured in the solid line in Figure 1 (see below), by exhibition, is federal revenue divided by gross domestic product (GDP), e.g., 15 % in 2011 (the most recent year for which data is available). And captured in the dashed line, by exhibition, is federal spending divided by GDP, e.g., 24 % in 2011.

For comparison purposes, since World War II onward the U.S. federal receipts metric has averaged 17.3 % and the federal outlays metric has averaged 19.3 %. Therefore, interestingly, we have averaged a 2 % federal budget deficit over a roughly 65 year history. See Figure 1, Figure 2 and Figure 3 for visual reference points.

Figure 1:

Visible in Figure 1 is the fact that the recent records on federal revenues mark a budgetary low point rivaling only the late 1940s and early 1950s period. The pre-2007-2009 recession level of receipts is often suggested as a return target mark once the economy has sufficiently begun improving, i.e., the 18 % level. The federal budget deficit had never breached the 10 % level, except for the year 2009 at 10.14 % (see Figure 2). Economists agree that recessions resulting from financial crises often prove to be deeper than other industry-incited periods of diminished production and lowered employment. This latter point might explain justification for the aggressive run-up in federal spending as embodied in the organized Troubled Asset Relief Program (TARP) stimulus funding, shovel-ready infrastructure projects and cash-for-clunkers spending programs.

As a recurringly popular counterfactual, a 45 degree line plot in Figure 3 (see below) is what people are effectively advocating when promoting enforcement of a balanced budget at the national level. It is worth reminding oneself, however, that even households borrow money to take out a mortgage responsibly once in a while; but, other times households borrow money to take out a mortgage irresponsibly. Firms and governments we would expect to perform just as poorly or favorably financially in much the same manner, at least until a binding credit ceiling is encountered and “the punch bowl” is emptied.

Meritworthy points to underscore in the graphics include:

1. Notice the structural shift in federal budget management techniques comparing observations of the 2009-11 constellation in Figure 3 (see below) against the much-different budget management of 1947-51. Low revenues and high expenditures versus low revenues and low expenditures;
2. Lower future consumption is the implied interpretation of lower savings now; and larger budget deficits now imply higher future tax revenues later;
3. A cyclical component of federal outlays is built into any federal system that allows its citizens to claim unemployment insurance as a safety net during a recessionary period with pressure on joblessness;
4. Many economists are recommending implementation of a value-added tax (VAT) in order to bring the U.S. up to par with other nations in recognition of how increasingly globalized the economy is; and
5. A proxy for determining whether unemployment is characterized by structural unemployment, as opposed to cyclical, is to measure just how long unemployed persons have been looking for work without successful effect.

Figure 2:

National proposals to reform the budgetary process are available in the so-called Simpson-Bowles Commission Report, i.e., that work completed by the National Commission on Fiscal Responsibility and Reform in December 2010. And Jeffrey Sachs, the Columbia University economist, has offered up his prescription of appointing a federal budget organizing lead position in the federal government in order to provide direction to the overall process. The “subsidiarization” rallying cry once advocated by Daniel Patrick Moynihan, the former New York Senator, and the rules-based principles counterpoint heralded by John Taylor, the Stanford University economist, would offer worthwhile backdrop from which to craft a way forward.

Figure 3:

Former Senator Alan Simpson of Wyoming spoke recently with legislative policy leaders at Regent University regarding the budget debate in Congress. There-in, he offered a uniquely candid and insightful view explaining the primary blockages to compromise in the current debate, e.g., Grover Norquist’s no tax pledge applied to Republicans seeking office. Tim Dickinson at Rolling Stone magazine is writing sweepingly about tax history over the last several decades, as is Bruce Bartlett, the controversial Republican economic adviser, discussing the issues here with Fareed Zakaria recently on CNN. Questions of fairness and equity are, consequently, a hot subject of discussion in the spotlight, with the Warren Buffett’s tax rule on millionaires, i.e., “the Buffett Rule”, under consideration for passage before the Senate. And now, “carried interest” and the Tobin Tax, or financial activities tax (the so-called “FAT Tax”), in terms of financial nomenclature, are suddenly entering into the light of day in terms of popular knowledge.


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