Endogenous business cycle spending + tax receipts at record lows = deficit hysteria for the wrong reasons
Readers here will know more about the US federal government income statement than I. However, given the near ubiquitous deficit hysteria, I wanted to illustrate the truth about the budget deficit. The truth is, that deficit hysteria has been set in motion by A surge in government spending on items like unemployment compensation, food stamps, and other types of ‘support payments to persons for whom no current service is rendered’ AND low tax receipts. Yes, long-term reform is needed; but my general conclusion is that the deficit hysteria is sorely misplaced.
First things first, the fiscal deficit – receipts minus net outlays as a % of GDP – is big. In June 2011, the 12-month rolling sum of net receipts (the budget deficit) was roughly 8.5% of a rolling average of GDP. This is down from its 10.6% peak in February 2010, but the level of deficit spending clearly makes some nervous.
Why should they be nervous about the ‘level’ of the deficit? I don’t know, since recent ‘excess’ deficits are cyclically endogenous. The chart below illustrates the spending and tax receipt components of the US Treasury’s net borrowing (see Table 9 of the Monthly Treasury Statement). Weak tax receipts and big spending are driving the federal deficits (spending, as we will see below, has surged on items directly related to the business cycle).
READ MORE AFTER THE JUMP!
In June, the 12-month rolling sum of tax receipts – mostly corporate and individual income taxes and social insurance and retirement receipts – was 15.6%, which is up from its 14.5% cyclical low in January 2010. On the spending side, net outlays in June 2010 were a large 24.2% of GDP and down just slightly from the 25.3% peak in February 2010.
Deficit hysteria should be more appropriately placed as “lack of jobs and tax receipts hysteria”. At this point, the budget could just as easily worsen as it could improve, given the fragile state of the US economy (see Tim Duy’s recent post at Economist’s View).
Why the wrong hysteria?
Reason 1. Taxes. Some would love to increase taxes – but the fact of the matter is, that tax receipts remain well below their long-term average of 18% of GDP. Tax receipts will not improve without new jobs since individual income taxes account for near 50% of total receipts.
Reason 2. The spending has been on cyclical items.
The best time to ‘worry’ about government spending is NOT when the economy is barely moving.
The chart below illustrates the big ticket items of the monthly outlays – roughly 87% of total outlays. The broad spending components are listed in Table 9 of the Monthly Treasury Statement. The long-term average shares of total spending are indicated in the legend.
The items health, medicare, and income security (inc security) are all above their respective long-term averages. But spending on income security outlays is the only spending component to have broken its trend, i.e., surge. According to the GAO’s budget glossary (link here, .pdf), this item includes the following cyclical spending:
Support payments (including associated administrative expenses) to persons for whom no current service is rendered. Includes retirement, disability, unemployment, welfare, and similar programs, except for Social Security and income security for veterans, which are in other functions. Also includes the Food Stamp, Special Milk, and Child Nutrition programs (whether the benefits are in cash or in kind); both federal and trust fund unemployment compensation and workers’ compensation; public assistance cash payments; benefits to the elderly and to coal miners; and low- and moderate-income housing benefits.
It’s spending on unemployment and food stamps that’s driving spending at the margin.
The same deal exists with the ‘smaller ticket items’. Of these 
OK – so deficit hysteria is about, but it’s misplaced. One could argue for more, not less, spending to get the jobs growth, hence tax receipts, up.
Rebecca Wilder
Oh thank goodness, for a minute I thought you were goint to tell me it was because of the hundreds of billions of military spending on our current campaigns or the trillions on financial services bailouts – thank God we can all sleep soundly knowing it’s food-stamps, libraries and WICK that are going to break the back of the nation.
The current debt/deficit hysteria was manufactured. The spring of 2010 saw a propaganda onslaught claiming that the US gov’t was bankrupt or nearly so. That, of course, is complete BS, but only a few economists stood up and said so. That propaganda not only frightened people, but it shifted the public debate away from unemployment and recovery to the debt and deficit.
As you point out, the increase in the deficit, as well as the deficit/GDP ratio, went as it was supposed to do in a severe downturn. The gov’t is supposed to spend money in such circumstances. It is supposed to run high deficits at such times. That is why we call such expenditures automatic stabilizers.
You know, that is neither a liberal nor conservative idea. Conservatives have read about the Seven Fat Years and Seven Lean Years in the Bible. They should embrace counter-cyclical policy.
Rebecca:
Medicare costs are decreasing in comparison to GDP.
I’m unclear about your analysis and POV here. Are you suggestion that the deficit is being driven by WIC and Food Stamps? Are you kidding? Really? Is it your opinion that this is a permanent expense or related to the current macro situation? I think you’ve drunk from the Fox well a little too deeply here, so let’s get this straight for you: why are we worried about deficits when interest rates are at an ALL TIME low? If you could borrow money, and lock it in at less than 1% for the next 10 years, would you be worried about how much you spent if your salary rose in accord with the economy? Analogy: people commonly stretch to buy a house because they know in 10 years the payment will take up less of their income. So what’s the problem here with Federal borrowing?
This is a philosophy NOT a finance question at all, and you’re spitting it back out again and I’m really tired of crappy posts from people adding to the misinformation. Right now, this discussion is pointless because we NEED SPENDING AND JOBS. Period. And if the private sector is incapable because of the business cycle than the government should step in, temporarily, and goose the system. It’s Macro 101 here. Why the deficit has become a fetish for people like you, I have no idea. Jobs, Jobs Jobs. Start repeating it until you believe it. And start repeating that the Government is the ONLY entity that can help at this point in this devastating cycle right now and stop repeating Extremist talking points. Jeez.
rjs:
huh right back at you . . .
Other projections show Medicare growth at ~ 2.7% (have to check again) May 2011 and no longer outstripping GDP by 2%. The data is relatively available. It appears to be more than just a blip on the screen for now. Commercial Healthcare as well as Hospital and Professional indexes are trending downwards. The comosite between Commericial and Medicare is ~ 5%. The ACA will cause it to shrink even faster once the full impact of it is realized in 2014.
Not sure why; but, Elmendorf (the killer of Hillary-Care which would have been far less in cost) appears to be doing the same with the ACA. CBO will not openly admit to this decrease. The rest I can not offer up at this time.
Rebecca:
You answer a question for me with your response. This was a point I was making to someone else that GDP and expenditures can not be compared without finding a common measurment. However, I will say Medicare is decreasing as a percentage of GDP.
Farrar:
I had the same issue with 2007. Try going into your “Tools” and looking for compatibility. I have used Safari at my son’s house with no such problem.
run…
my “huh” was because everything i’ve read in the 2 1/2 years ive been on this beat has talked about health care costs rising faster than anything else in the economy (except maybe tuitions) …
so i did a quick search on the annual rate of medicare cost increases & came up with the link i quoted, among others; so if you have something different i’d like to see it…ive got no skin it it; im all about knowing…
addendum; i know medicare costs are less than private insurance (ive read krugman)
but what you said was “decreasing in comparison to GDP”
maybe you just misspoke…
rjs,
Unfortunately, you’re having an exchange with a guy (run75441) who won’t provide any links or quoted proof for you or Rebecca. Typical encounter.
Medicare expenditures in relation to GDP appear to indicate a brief decline in 2012 and 2013 prior to moving higher again thereafter. CBO indicated this on a chart that I can’t locate right now. But, here are a number of reports that support your general observations.
There is no question that Medicare expenditures are projected to increase as a percentage of GDP as will be quite evident by 2020 and thereafter as the expenditure growth is significant. Moreover, increasing Medicare costs will require larger net outlays support from the General Fund and projected Federal Budgets unless major changes occur. Both the President’s and CBO’s budget projections indicate this situation going forward.
Here are the CMS updated projections released last week as cited by the White House but not identified with a link. CMS hasn’t updated the page you cited, but this is their new data:
National Health Expenditure Projections 2010-2020
July 2011
http://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pdf
“Medicare spending is estimated to have been $525.0 billion in 2010 as growth slowed to 4.5 percent, down from 7.9 percent in 2009, due in part to an across-the-board reduction in the rate of growth for payments to Medicare’s private health plans by 3.4 percent. Medicare is projected to grow 5.9 percent in 2011, but only 1.7 percent in 2012; the slow growth in 2012 is driven by a 29.4-percent reduction in physician payment rates required under the Medicare Sustainable Growth Rate (SGR) formula. (Under an alternative scenario where physician payment rate updates are based on growth in the Medicare Economic Index, or MEI, Medicare spending growth is projected to accelerate to 6.6 percent in 2012.) Average annual Medicare spending growth is anticipated to be 6.3 percent for 2013 through 2020, reflecting increasing enrollment (as the oldest baby boomers become eligible for Medicare) that will drive up spending, and provisions of the Affordable Care Act that call for reduced fee-for-service provider payment updates and lower payments to private plans.”
Here’s an excellent detailed Medicare costing breakdown and projections provided by CBO:
CBO – March 2011 Medicare Baseline
http://www.cbo.gov/budget/factsheets/2011b/medicare.pdf
Here are two more CMS reports worth noting:
Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers
May 13, 2011
http://www.cms.gov/ReportsTrustFunds/downloads/2011TRAlternativeScenario.pdf
Note Table 5. Projected total Medicare expenditures as a percentage of Gross Domestic Product (GDP) under the Illustrative Alternative Scenario compared to the 2011 Trustees Report, selected years 2009-2080 on pdf page 19.
2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds
May 2011
https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf
Note Table III.A2. — HI and SMI Incurred Expenditures as a Percentage of the Gross Domestic Product on pdf page 55.
ok, what im seeing there is a slowing of growth in 2012 due to a “29.4-percent reduction in physician payment rates”; thats without what is known as the “doc fix”, right?
im under the impresion that has been rescinded every year since 1997(?) because it’s proven to be unworkable (ie, doctors threaten to drop out of medicare)
would that it could be enforced, as i believe US doctors are paid twice OECD average, but until we see it, it’s pie in the sky…hell, ive seen the hospitals are already screaming bloody murder over a 2% hit…
btw, austin frakt has new federal budget charts with latest CBO data, but the change in the medicare segment is indiscernible…
Rebecca,
The Congressional concern over the projected federal budget deficits can be summed up in two charts. I will cite Treasury charts which I consider to reflect conservative estimates. I could cite the same type of charts from CBO and other sources. The bottom line doesn’t change.
The arrogant scoffing and howling about such Congressionl concerns is bullshit and misdirection. The bottm line of concern boils down to the two issues portrayed on the charts below. Period.
If you don’t believe that, do a face-to-face or call a U.S. Senator or U.S. Representative. Show them these two charts and observe how they react. These are the driving issues.
http://www.fms.treas.gov/finrep/supp_info/fr_supplement_info_sustainability.html#chart3
http://www.fms.treas.gov/finrep/supp_info/fr_supplement_info_sustainability.html#chart4
rjs,
Yeah, the Congress will do another Doc fix. Otherwise, the number of doctors supporting medicare patients will plunge, thereby increasing the workload for hospitals.
rjs,
Yes, Figure 1.1 on page 6 of the CBO reference shows the slight dip. Thanks.
http://www.cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf
Yes, but all I hear about on the Sunday news series is the ARRA, TARP, unemployment benefits. They don’t understand.
Reforming medicare and healthcare spending is needed – but that’s NOT what is going to come out of this bill in coming months. You’ll see.
They’re doing more harm than good with this pansy cutting of the “defict” (starting next year, mind you) through discretionary spending caps and threats to reform.
It’s ridiculous and certainly dragging confidence. The hysteria is misplaced – seriously, let’s deal with this in 3 years. We can AFFORD it!
Rebecca
page 6? oh, ok, its p20 of the pdf…
rjs, right. Sorry.
Rebecca,
I believe it helps to have a better understanding of the federal budget outlook picture. If you’re going to criticize the House Republicans or Senate Republicans, then it is beneficial if you knew which budget year is serving as their base year going forward. It appears that FY2010 is the base year from which many decisions are being made. I think that is an understandable choice for obvious reasons.
Hopefully, the following information will help you see what has actually unfolded on the federal budget front.
The House Budget Committee (HBC) released two interesting reports regarding comparisons of discretionary spending for fiscal years 2008, 2009, 2010, and now 2011. Once you get beyond the nasty titles and partisan narratives, the data is summarized by department and agency. I compared the new HBC report to the OMB historical tables data, but all FY2011 data is still projected.
The HBC comparisons are important if undertaking this type of analysis. I don’t share most of the viewpoints expressed in the reports, but that’s another matter.
Here’s the info:
House Budget Committee (HBC) publications
http://budget.house.gov/News/DocumentQuery.aspx?Year=2011&DocumentTypeID=1940
HBC discretionary spending analysis, July 15, 2011
http://budget.house.gov/News/DocumentSingle.aspx?DocumentID=252211
HBC discretionary spending analysis, Feb 3, 2011
http://budget.house.gov/UploadedFiles/spendingspree.pdf
OMB Budget Historical Tables
http://www.whitehouse.gov/omb/budget/Historicals/
OMB Historical Table 4.1—Outlays by Agency: 1962–2016
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist04z1.xls
OMB Historical Table 8.7—Outlays for Discretionary Programs: 1962–2016
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/hist08z7.xls
Rebecca,
Take a good look at the following data. I see no evidence that the sky is falling with the small level of spending reductions approved and projected in the Budget Control Act of 2011. Moreover, it is my understanding that the spending reductions are not heavily front loaded.
As I explained already, the primary issues are the projected Debt Held by the Public and projected net interest payments identified in the two Treasury charts. Beyond those considerations, the issue of growth in Intragovernmental Holdings (debt) is significant, particularly in light of the future obligations that will fall to future federal budgets for Treasury securities redemption.
The actions being undertaken during this decade are in preparation for major budget issues that ramp up quickly and forcefully during the next decade. In other words, the more serious storm is still ahead.
Here are projections for FY2012 and FY2013. Note that I consider FY2010 as the base year for budget analysis.
Comparing Federal Budget Total Outlays (Expenditures)
OMB Historical Tables
http://www.whitehouse.gov/omb/budget/Historicals
CBO’s Estimate of the President’s Budget
http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2021
Outlays 3,456 3,655 3,708 3,800 3,976 4,191 4,476 4,687 4,896 5,200 5,483 5,756 46,172
Deficits 1,294 1,425 1,164 901 764 748 841 870 902 1,021 1,101 1,158 9,470
2012A: -$22 billion or -0.58% $3,686 billion in outlays
2012A vs. 2012 outlays: 3,686 vs. 3,708 -22 billion or -0.58%
2012A vs. 2011 outlays: 3,686 vs. 3,655 +31 billion or +0.80%
2012A vs. 2010 outlays: 3,686 vs. 3,456 +230 billion or +6.55%
2012A vs. 2009 outlays: 3,686 vs. 3,517 +169 billion or +4.80%
2012A vs. 2008 outlays: 3,686 vs. 2,982 +704 billion or +23.60%
2012A vs. 2007 outlays: 3,686 vs. 2,728 +958 billion or +35.12%
2012AB: -$22 billion -$150 billion = -$172 billion or -4.64% $3,536 billions in outlays
2012AB vs. 2012 outlays: 3,536 vs. 3,708 -172 billion or -4.64%
2012AB vs. 2011 outlays: 3,536 vs. 3,655 -119 billion or -3.25%
2012AB vs. 2010 outlays: 3,536 vs. 3,456 +80 billion or +2.31%
2012AB vs. 2009 outlays: 3,536 vs. 3,517 +19 billion or +0.54%
2012AB vs. 2008 outlays: 3,536 vs. 2,982 +554 billion or +18.58%
2012AB vs. 2007 outlays: 3,536 vs. 2,728 +808 billion or […]
rjs:
Be patient
RJS:
Think about what MG is parroting here. Is it really Medicare causing the increase or is it the healthcare industry? Will cutting Medicaid, Medicare, SCHP, etc. have an impact on he rising costs of healthcare? The healthcare industry controls the costs of medicare, etc. You can follow the parroting of MG who is a C & P professional or you can begin to understand what is driving medical costs.
Do not be so willing to follow those who flip cow shis to see how far they will go. Which pill is it, the blue or the red? My comments on Elmendorf is fact.
Rebecca,
I think you have part of your limited analysis wrong. Both in your main post and in comments here.
There is no question that some of the near-term federal budget impacts are quite obvious. I have no principal argument on those points except for the fact that significant federal budget increases has occurred in other areas which you didn’t address. And, no, at this juncture I don’t expect you to be a budget expert. Few talking head and blogging economists have major strengths regarding federal budget details and projections. Some are quite ignorant on this subject matter. Hopefully, you will become an exception as the opportunity is available to do a much better job on such analysis.
The medium-term and long-term projected federal budget deficits are serious concerns. The reality is that Congress needed to get started now if they are to have any chance at slightly turning the corner by the end of the decade. I say ‘slightly turning the corner’ because the outlook beyond 2020 is dangerous for many reasons.
Absent an effort to chip away at the growing national debt load, the U.S. was headed for adding another $9-11 trilllion to Debt Held by the Public no later than 2021. That excludes the projected growth in Intragovernment Holdings (debt). Now, you say – as have others – that we can afford to wait three years before tackling the federal budget issues. No, we can’t. The Congress has been so slow in addressing these issues that a three year delay would end up being a five to seven year delay. The Congressional history for not dealing with reining in federal budget expenditures is well known throughout the Capitol.
What we witnessed is a major change that will take hold for many Congresses going forward. The old ways of passing the buck along are over. The U.S. Government is still on an unsustainable fiscal path, but this small step (and that is what it is) points the Government in the right direction. The Congress reduced the CBO projected $9-11 trillion in additional Debt Held by the Public by roughly $2.5 trillion. That leaves $6.5-8.5 trillion in potential additional growth in Debt Held by the Public by 2021. That is unsustainable due to projected net interest obligations growth, so there is more work to be accomplished.
I would have to say that the deficit hysteria is really among those who were blind or ignorant to see the need for taking action that is not front loaded but does address the need to trim projected deficit spending during this decade instead of pushing off this responsibility until the next decade. Many of the howlers and promoters of the anti-deficit reduction hysteria and misleading statements are the same individuals who screamed throughout the last decade as federal budget deficits rose. They are political hacks. And they will always be political hacks, regardless of the credentials they hold.
Yes, there are economic realities now and in the near-term future that need to be addressed in some matter by the Congress and the Administration. But trimming $200 billion or less out of a fiscal year federal budget will not eliminate the possibility of action in addressing the more pressing economic problems. If anything, the minor reductions in spending will provide headroom to support such spending needs if the majority in Congress are willing to act. There is that side of consideration not being addressed by the same old howlers.
I expect that we may see a balance of Congressional thinking between dealing with serious and […]
run; nowhere did i say or imply that i favored cutting medicare or medicaid (which i am not); ALL i questioned was your comparison of medicare cost growth in relation to GDP…geesh…
MG:
You could not discuss ACA or healthcare costs without a recital of something. You are little more than a scarecrow in the field with the rigid pole of copy and paste to support your views. Have you something original to offer or are your views strictly parroted from the CBO?
Elmendorf was the killer of Hillary-Care. He is no different now. Hillary Care would have been far cheaper than the ACA. Elmendorf taints the CBO views on healthcare. Hospitals are making money even with the reduction in reimbursements. Medicare patients are the fastest growing portion of healthcare. Do you really believe primary care doctors will ignore them? They are their bread and butter. The ACA has diverted more money in Medicare to primary care at the expense of specialists which supplants any cuts.
My views on Medicare compared to GDP are progressive and supported by one healthcare economist and a major agency rating firm. While they will not admit to a trend, they will admit to it being more than just a blip on the screen. The drop between May and June was signidicant and shows a 6 month trend.
Rebecca never bothered to follow up, but perhaps she caught this news:
U.S. Government’s credit rating is now AA-plus
Well, it happened. Friday, August 5, 2011.
AP – Friday evening – Credit rating agency Standard & Poor’s says it has downgraded the United States’ credit rating for the first time in the history of the ratings. The credit rating agency says that it is cutting the country’s top AAA rating by one notch to AA-plus. The credit agency said late Friday that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation.