Federal Deficit as a % of GDP
I don’t know about you, but when I recently updated this chart I was pleasantly surprised by how much the deficit had improved. In the third quarter of 2012 –the last quarter of the previous fiscal year — the deficit had already fallen to 7.0% of GDP as compared to the peak of 10.5% in the fourth quarter of 2009.
Moreover, with the ending of the tax break on payroll taxes and higher taxes on the top incomes as well as prospects for improved growth in 2013 we may be experiencing the best improvement in the deficit picture since the Clinton presidency. Moreover, the large scale shifting of incomes back to 2012 to avoid higher taxes implies that the last quarter of 2012 could also show a big improvement. This chart clearly shows why all the deficit hawks are keeping quiet on what is actually happening to the deficit
Why were you “pleasantly surprised”?
What is the relationship between the deficit as a percentage of GDP and GDP growth?
Answer: GDP grows more when the percentage is high.
How about GDP growth is the strongest when the deficit is falling?
Problem is that this is actually bad news as the economy is being starved of needed savings at a time when the economy is very fragile, and austerity rules the day in places like Europe.
This is a contractionary event.
During the Clinton Surpluses we had a increasing trade deficit, declining savings rate, and an increase in household debt. Remember when the government is in surplus, then the private sector goes into debt.
This is not a positive event.
Read “Can Goldilocks Survive” by Wynne Godley written in 199.
Spencer, if the economy starts accelerating then debt and deficits always improve. However, if the proper level of deficit spending is not maintained that it has a high probability of triggering a poor economy in the near future.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001
2004-2007: U. S. Deficit Reduced 61% (from $413B to $160B) Great Recession began 2008
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Thanks for the chart. It also goes to show that this short-run deficit hawk business is politics not economics. It sounds good to advocate cutting spending and to impose a nonsensical debt ceiling. It’s playing to the populists and completely neglects responsible, real-world macroeconomics.
“Improvements” to the deficit might actually hinder the economy right now, however. While the effect of tax increases for incomes over $400,000 are unlikely to have a negative economic impact, 2% – 3% increased in payroll taxes for the middle class WILL hamstring the recovery. Deficit fear when we are near zero lower bound in unjustified.
except the payroll tax is not a tax. it is the only way working people have to save a portion of their income safe from inflation and market losses so they can hope to retire at a reasonable age with at least enough to eat and live indoors.
i don’t think playing the “taxes hamstring recovery” game is very smart. not when it’s the rich paying the tax, certainly not when it’s the poor providing for their own future.
we gain nothing in this economy by tax cuts. the people paying taxes already have money. we need the government to spend money to create jobs that do things the people need done that private enterprise cannot or will not do.
if that spending creates deficits so be it. but creating deficits by cutting taxes is what got us to the situation we are in now.
In other words, coberly, you are saying that creating deficits by reducing revenue hurts the economy while creating deficits by increasing spending helps the economy.
1. FICA is a tax, the worst tax America ever devised.
2. FICA does not and cannot help working people “save a portion of their income from inflation.” It takes money from the pockets of those working people, costing them the very losses you think FICA prevents.
FICA does not pay for Social Security or for Medicare, both of which can and should be supported by the government.
And while FICA does reduce the money supply (thereby reducing GDP growth), it does not prevent inflation. The Fed does that via interest rate control.
3. Taxes do hamstring the recovery. The formula for GDP is this:
GDP = Federal Spending + Non-federal Spending – Net Imports.
Taxes reduce Non-federal Spending, thereby reducing GDP growth.
4. What the economy gains via tax cuts is Non-federal Spending, which is a stimulus.
5. You are correct that “we need the government to spend money to create jobs that do things the people need done that private enterprise cannot or will not do,” but taxes do not help the government spend money.
Even were taxes to fall to $0, the government could continue to spend. That is the fact of Monetary Sovereignty.
6. Cutting taxes has, and will have, only positive effects on our economy; zero negative effects.
Rodger Mitchell: FICA is one of the most reasonable “taxes” we have. It is making mandatory the need to save for one’s retirement. Further, the returns to low income earners is substantially greater than that to higher income earners – it thus provides a measure of progressivity. It makes more sense than many other confiscation schemes dreamed up by the government.
The main problem right now is that the amount withheld from paychecks is not projected to pay for the retirement projected. Thus, some correction to the model must be found.
FICA does not pay for Social Security. In a Monetarily Sovereign government, taxes do not pay for government spending.
For monetarily non-sovereign governments, taxes do pay for spending.
So you might do well to learn the difference between Monetary Sovereignty and monetary non-sovereignty
Are you advocating the elimination of all taxes and let government spend whatever they want with no regard to the impact on the federal debt?
there is nothing wrong with the model.
if we are going to spend a larger percent of our lives in retirement (because we are going to live longer but don’t want to work longer)
it makes sense to spend a larger percent of our wages on saving for that retirement.
the larger percent needed is one tenth of one percent per year for about twenty years until the demographics and economy stabilize.
that is not a burden. you get the money back with interest. and even the rather low growth in wages projected by the Trustees would leave the workers with twice as much in real dollars in their pocket AFTER paying the increased tax… plus having guaranteed a longer retirement at a benefit level that is also twice as high as today’s.
i’ll leave others to try to reason with you. i know a true believer when i see one.
@ goot & @ coberly:
The real determinant of the feasibility of Social Security (or any other type of retirement system, private or public) is productivity. If productivity falls short, then supporting a class of retirees is impossible, regardless of how much “cash” buffer (the Social Security Trust Funds) we have on hand.
Candi I agree in principle. Which suggests a discussion focused on three points:
One) what level of ultimate productivity does the current Intermediate Cost Alternative projection assume?
Two) is that level of productivity actually justifiable given all we know (or think we know) about future economic trends?
Three) are there ways to address productivity through policy so as to attain results above IC and approaching LC (Low Cost and also fully funded SS) numbers?
But we never have that discussion or indeed anyone actually using the ultimate productivity number in question. Instead we have hand waving that in effect asserts Intermediate Cost outcomes and then proposes solutions that implicitly rely on much better productivity numbers.
This shell game was highlighted in 2005 by Dean Baker with his NELB (No Economist Left Behind) Challenge which in effect asked privatizers to show how they could achieve traditional rates of return on equities given the productivity assumptions of Intermediate Cost.
And I added the request that if it became necessary for privatizers to adjust those productivity numbers up then that they should rescore Social Security outcomes.
The overall response to both challenges was crickets. But I haven’t given up hope that someone would step up to the plate. Either future productivity numbers are sucky enough that all retirement schemes are moot or there is some potential upside in the direction of SS solvency. But crisis mongers can’t have it both ways.
Maybe we are fucked. Fine admit that and we can move on to mitigation. Which won’t include magical returns on equities given IC productivity numbers. Over to you.
Table V.B1.—Principal Economic Assumptions
Ultimate Productivity (2020 on) 1.68%
Ultimate Real Wage: 1.1%
Real interest: 2.9%
Nominal interest: 5.7%
Real GDP: 2.1%
Are those really our best estimates of MEDIAN outcomes? Are there exactly no policy proposals that could target ANY of those numbers in ways that would improve solvency?
If so why? And why not? Until we actually have discussions focusing on the actual numbers underlying Social Security ‘crisis’ I have to call bullshit. Note that the corresponding numbers for fully funded Low Cost are 2.8% Real GDP and 1.7% Productivity. Are those really such pie in the sky numbers that even results approaching them are out of the question? And if not how does that translate to solvency scoring?
Until I get some answers to those questions a few sorta lazy claims about productivity aren’t going to cut the mustard. MAKE me look like an uninformed IDIOT. Using NUMBERS.
“RMM, Are you advocating the elimination of all taxes and let government spend whatever they want with no regard to the impact on the federal debt?”
No Critter, are you advocating the elimination of all federal spending and let the government tax whatever they want, with no regard to the impact on the economy?
Now that we have traded stupid questions, why not learn Monetary Sovereignty?
Just when you think you have it all covered, the brown stuff hits the fan…
Here in the Netherlands we have a pension scheme where most if not all people save for their own pension (which is added to a universal state provided old age pension). All in all, on 16 million people, we have accumulated over a 1200 billion euros in pension funds.
But here’s the thing. We thought we had arranged it all pretty good. For decades, ‘workers (as opposed to the state provided part)’ pensions were affordable (paid for by both employers and employees), and those ‘workers’ pensions were increased yearly with inflation. When retiring at 65, the average drop in income was a mere 15 percent.
Then the Great Recession and Euro crisis hit, and since most pension funds hold large stocks of government bonds, and since interest on newly issued governemnt bonds dropped to below one percent (on Dutch bonds anyway), most if not all pension funds wound up in trouble because their projected revenues no longer covered their projected obligations.
The result is that for the first time since WWII, there is no correction for inflation, pension premiums are going up, and, on average, ‘worker’ pensions have been cut by 1 percent.
My point is: productivity is a side factor here. The main issue in a private pension scheme is the (actual and projected) revenue on the accumulated pension funds. These revenues are particularly vulnerable to long recessions or a depression like slump. You need to make extra provisions to prevent being forced to lower pensions in an already depressed economy.
And so the percentage of current income spent on future retirement income, and the height of that income, depends in large part on future inflation, income correction of that inflation, and foremost on projected revenues on the pension funds being put aside. That can be a, hm, volatile mix…
As far as I can understand these matters, the only question about the deficit should be: is it the correct size to enable the economy to run at maximum efficiency and minimum unemployment?
Throwing around some economic terms with pejoratives won’t cut it…explain the theory, its strengths and limitations, proponents, etc. Stamping your foot and saying ‘because my theory is true’ is not the way to go here.
The arguments developed for SS here are particulary American and political in the language used, and have been carefully honed to this political “debate”.
If you want to further your views on MMT variations with which I am familiar, and your own thoughts, perhaps a useful set of comments might emerge.
Huh? You publish a link to answers to your questions, then complain I’ve not answered your questions.
But you want me to explain completely, an economic theory, in a blog comment. Yikes!
If you truly want to begin to understand Monetary Sovereignty, go to: http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/
Perhaps I was not clear…the link is useful and comes first to guide readers, with some explanation of why I should go there, and then some context. That I think is something you could do initially…otherwise your comments from my perspective feels like simple shouting.
That’s all…I could check with some of our homegrown MMT economists for some posts on the issue.
Perhaps I was not clear. The second link I gave you — (http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) — provides a summary.
Additionally, my blog contains 900+ posts,(Whew!) most of which describe attributes of Monetary Sovereignty.
After writing 900+ posts, plus a book, I get a bit miffed when someone accuses me of not explaining Monetary Sovereignty, and “simple shouting.”
I can’t pump it into your head. You have to make at least a little effort to read it.
Monetary Sovereignty is the basis for all modern economics, and if you don’t want to read it, you won’t understand anything about economics.
you are correct, but also not correct.
ultimately EVERYTHING depends on productivity.
but the way that productivity is distributed depends on the law. (which we write).
Social Security currently depends on a law that assigns benefits according to a formula based on HOW MUCH YOU PAID IN.
Social Security does not depend on “cash on hand.” It was designed as “pay as you go” to avoid the problems with “cash on hand”, or “bonds.”
As long as workers are making enough (in terms of productivity, or cash as the legal means to acquire a share of that product) to “save” a reasonable portion for their future retirement, the best way to manage that saving is to use it to support current retirees. That’s what Social Security does.
You, and others here, can get lost in a wrap of words without understanding the very simple real world facts.
The argument is not about how to get more productivity but how to distribute it legally. SS does that very well, and can continue to do as well or better than any other scheme the ideologues of one stripe or the other have come up with.
We are a long, long way from productivity so low that “supporting a class of retirees is impossible,” especially if they have paid for it themselves.
There are complications to that but even the “insurance” factor is based on what you paid in.
get miffed all you want.
what you write here is not good enough to encourage anyone to read your blog, much less your book.
you may deep in your brain know that you are right, but if you can’t sell it no one will buy it.
frankly, i think Dan is being too kind to you.
I think the most important thing about Social Security is that it is not broken, and can legally meet benefits without any changes in age or FICA taxes – so long as productivity does not collapse. And if productivity did collapse more taxes does not fix it because the money cannot buy anything retirees need in the first place.
Two, deficits are completely misunderstood by most people (a lot of smart ones too) and apparently many economists. Deficits are actually private savings.
Three, we don’t need to raise tax revenue right now – we just do not other than for political purposes as some just want to stick it to the rich. We need more money put into the economy – which is not happening via bank lending right now, which leaves the government deficit spending as the mechanism (QE is reserves printing via an asset swap not money printing).
In regards to three, we need to be running deficits of about 12% of GDP until unemployment hits 4%, or inflation starts to exceed say 5%. The TC Rule 1.8 (Current Unemployment – Unemployment Target) + (Inflation target – Current inflation) + Population Growth = Target % Government Deficit
Your comment while correct enough within its own frame (private pension investment funds) just highlights the difference between the Dutch style pension plan that is dependent on ROI (for at least its private component) and Social Security which mostly isn’t.
Instead Social Security benefit formulae are bifurcated, with initial benefits set by lifetime average Real Wage and continuing benefits by price inflation. Since Real Wage is by definition post-inflation, revenues will stay ahead of costs in almost any positive Real Wage scenario. And Real Wage historically has tracked productivity. Making productivity the key variable.
If and only if the political system can maintain the link between productivity and Real Wage in light of the power imbalance that allows wage setters (overwhelmingly the owners or servants of capital) to suppress wages as close to subsistence as the economic and political system allows.
Social Security can only fail in two circumstances: permarecession that leads to actual stagflation (in my terms a situation where inflation outpaces employment/real wage) or acceptance of an economic theory that holds that WHATEVER wage results is by definition just an exact measure of actual marginal labor productivity set by the Invisible Hand and not subject to wage pricing power by employers.
So the total answer is not just productivity. There is also a need to push back on the actualization of an economic theory biased towards capital (in part the role of Angry Bear) and a parallel need to defend labor friendly programs that offer a needed offset to capital’s wage pricing power. (Which explains such things as the outright hostility and blockage of such entities as the NLRB).
Worker productivity plus ‘heterodox’ economic theory plus democratic action. With that combination Social Security solvency just comes about as a minor by-product.
Bruce, wages are being held low because the flow of money into the economy has been inadequate for some time. The economy is producing lots of stuff, but there is inadequate demand for that stuff. So if we are biased toward capital, it is the irrational fear of inflation and deficits that is the cause of that. Run deficits of 12% of GDP for the next few years, and I bet we see wages go up.
Unfortunately, at the state and federal level the bias has been to suppress take home wages (and demand) with increasing taxes and deficits that are too small.
the size of benefits does depend on the share of production that goes to workers
but SS is designed so that as long as workers are getting enough of their share to pay for immediate living expenses and “save” enough for their own retirement SS will be the best way for them to do that saving.
Wages could go down, and we won’t like it. But until we can fix the political system… if we can do that before ecological disaster is upon is… SS still provides the only way workers can protect enough of their savings from inflation and market losses to have enough to live on in retirement.
in reply to your comment far far above..
deficits created by spending will help the economy.
deficits created by tax cuts will not.
To coberly and critter:
Deficits created by spending will help the economy.
Deficits created by tax cuts also will help the economy.
The formula for GDP is:
GDP = Federal Spending + Non-federal Spending – Net Imports
Spending increases the 1st term. Tax cuts increase the 2nd term.
I believe I do understand what you are stating in your Monetary Sovereign premise; but, I do not believe your snarky comments is gaining you any converts. I do not believe your premise will fit into the political environment we are entrenched in today as each party says no and are more concerned about representing ideology rather than constituents.
You do have to take the time and explain the whys also. I would . . . People should not have to run to your blog to get a feel for your thoughts on the topic.
relying on the holy formula is a good way to keep from thinking.
tax cuts do not translate automatically into additional spending.
that’s the problem. see. we went through this in the great depression. people were too scared (with good reason) to spend, or invest. tax cuts would have just given them more money to sit on.
we got into the present economic situation by policies that had as their core “tax cuts for all reasons.”
there are times in history when tax cuts will provide “stimulus.” there are times when they will not. this is one of those times.
in any case, there are also times when the government can spend money better than you can.
you see, your conclusion from your formula does not anticipate that “not cutting taxes” and spending the money on real world goods and services, especially “infrastructure” will result in more stimulus than cutting taxes would.
Denying one of the most fundamental formulas in economics guarantees not thinking.
Additional money to spend begets additional spending. The notion that having less money somehow could translate into greater spending is beyond silly.
Tax cuts provide money. The idea that tax cuts just give people money to sit on is preposterous.
People are scared when they see their money disappearing, and they are optimistic when they have more money.
As you soon will see, the increase in FICA and the decrease in federal spending will lead to a recession if we are lucky and a depression if we are not.
What is your evidence that “this is one of those times” when tax cuts would not provide stimulus?
examining formulas for their failure to meet the demands of reality is how i made my living.
you might consider, just as a thought exercise, that if tax cuts lead to higher spending on,say, cocaine and heroin, it might lead to a lower GDP.
The income to the folks selling dope will not make up for the lack of productivity of those buying it.
The world is such a complex place and all.
As for evidence… well, let me suggest an experiment. Let us rescind ALL of the bush tax cuts, raise the payroll tax one tenth of one percent per year for a couple of decades, and put a “deficit emergency patriotic surtax” of ten percent on all income over 100k… and see what happens to the economy.
Sorry, I don’t mean to encourage you. I get a little tired of “ipse dixit” as a form of argument.
Bill H aka run75441
I’ve devoted thousands of hours to creating the 900+ posts on the blog, the purpose of which is to teach Monetary Sovereignty.
I really don’t have the time to repeat all that for individuals who want free, personal attention.
If you want to learn Monetary Sovereignty, you’ll go to the blog. If not, you won’t.
“Let me suggest an experiment. Let us rescind ALL of the bush tax cuts, raise the payroll tax one tenth of one percent per year for a couple of decades, and put a ‘deficit emergency patriotic surtax’ of ten percent on all income over 100k… and see what happens to the economy.”
Let me know how your experiment turns out. No, never mind.
“The idea that tax cuts just give people money to sit on is preposterous.”
Too broad a statement. 80-90% of the constituency is not going to sit on its money. They will spend it. Ths is where the current stimulas has come from in the past two years.
Rather than this: What is your evidence that “this is one of those times” when tax cuts would not provide stimulus?”
Define who will spend and who will not spend.
You do not control the discussion as to “what” you will answer and what you will not. If you wish to participate then you have to be a little more transparent. As Bruce once said to another poster, you assign homework and retreat from the discussion.
I took the time to read yor website with the minute print and you did the very same thing as you are doing here. Rebuttal with no basis or explanation.
You are saying something that does not make any sense.
Lowering taxes does not stimulate an economy the same way as extra state spending (and borrowing), and they are not interchangeable for a very simple reason: spending money on things you already bought (i.e. relieveing your debt) is not the same thing as spending money on new goods (i.e. accumulating new debt).
When things get shaky economically, the first thing people do with current and extra money, is lowering their debts, not accumulate more debts…
And so, lowering taxes does not necessarily have the same effect as increased government (borrowing and) spending…