History Lesson – Deficits as a % of GDP, Tax Rates
Reader Matthew McOsker writes more on the deficit:
History Lesson – Deficits as a % of GDP, Tax Rates
DISCLAIMER: This is not a defense of Bush II. Just the facts on the deficit, and a further discussion of sectoral balances and some tax rate info.
Let’s look at some history, because the belief is that Bush II ran the biggest budget deficits ever, and ruined the Clinton surpluses. I wish we did not spend so much on the military under Bush. However, the Bush deficits were not that large as a % of GDP. His father, and Reagan ran bigger ones. The deficits were not that far off where we were at the end of the 70’s either. Now keep in mind, that the trade deficit does factor in – been having trouble assembling historical data on this. When running a trade deficit we need to run a federal deficit to keep the private sector in balance.
See Credit write downs on sectoral balances:
The key formulas is as follows:
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
Via Business Insider L Randall Wray
Lastly, the Obama deficits are exactly what we needed to make up for the deficits that were probably too small under Clinton and Bush II.
Now, much of the talk on historical Tax Rates focuses on marginal rates- I found this table to be quite interesting as it looks beyond the top marginal rates, and breaks out lower income folks.
Data is for 3 groups 1/2 median income; Median Income ; Twice Median income respectively
Year — Average Combined Rates for each group that includes payroll taxes and EITC , and the last numbers are the top and bottom marginal rates that excludes payroll taxes ( I just sampled a few years, go to the link to see more. I used average cause that better reflects what one actually pays) :
1970 — 9.45% — 12.7% — 15.15% — 14% and 70% Nixon
1979 — 11.24% — 16.97% — 20.32% — 14% and 70% Carter
1982 — 13.21% — 17.76% — 21.94% — 12% and 50% Reagan
1990 — 12.77% — 16.98% — 19.83% — 15% and 28% Bush I
1992 — 12.2% — 16.83% — 20.13% — 15% and 31% Bush I
2002 — 5.42% — 14.18% — 19.83% — 10% and 38.6% Bush II as Clinton Rates still in effect
2003 — 3.45% — 12.99% — 18.05% — 10% and 35% Bush II
From Tax Policy Center
to extend your chart into the future using CBO projections, here is a chart from Bill McBride; it shows that for most of the next decade, deficit as a percentage of GDP will be less than the Reagan-Bush years…
of course, im on record as believeing our deficits are too small, for precisely the sector balances reasoning cited by randy wray above…
Thx rjs. I also have a follow up post with Rdan that merges in trade deficit data. Under Bush II this was way out of balance.
I am no fan of the tax policy humbug factory.
1. Why does a large trade deficit imply a large Federal deficit? Did not import a lot of stuff during WW II.
1a, Why won’t the surplus country put its excess dollars in better places (import US stuff, or Saudi oil which trades in USD) than the US Gumint?
2. Why would that current account deficit driven federal deficit be needed to keep the private sector in “balance”?
3. What is private sector balance?
4. Why do you use [tax policy center’s] %GDP?
5. Why not use dollar deficit in a constant dollar?
You could highlight the recessions in early/late Reagan, Bush I and early Clinton with the %GDP points.
You also may want to note that effect of SS and medicare surplus receipts to artificially lower the %GDP for 1983 thru Bush II.
I am feeling that trade deficits are too much import without tariffs to make up for the loss of US manufacturing wages which would be taxed.
Feeling like Plato this evening…..
1) The trade deficit doe not ‘imply’ a budget deficit, as it can be offset by private borrowing/decline in private savings. But, the latter cannot exceed forever the private sector’s ability to make good on their debt or the savings runs out. During WWII we ran a large deficit that offset any trade imbalances – IMO. In 2007 the trade deficit was 6% of GDP compared to a budget deficit of 1.15% – that was way out of whack and when private debt peaked in the housing market.
In the end, if we buy more from abroad than we sell – we have negative national saving. So either the public sector must have negative savings (i.e. a budget deficit) or the private sector must have negative saving.
1a) Good question and worthy of more looking and a post. Usually, those countries often park it in treasuries.
2) See #1, trade deficit needs an offsetting deficit somewhere else either private or public. See Wynne Godley’s paper here: http://www.levyinstitute.org/pubs/wp_494.pdf
3) Read much of Wynne Godley’s stuff on this but essentially in the post’s link from Randall Wray is a good piece that discusses this.
Wynne Godley Publications: http://www.levyinstitute.org/publications/?auth=104
4) Post is not clear the tax rate stuff is from Tax Policy Center, but they created those numbers with the urban institute, and Brookings. The chart data did not come from Tax Policy Center, but government supplied data.
5) Not sure it has an effect on the sector balance in any given year.
Yes I would like to add in recessions. I am working on building this chart out. Maybe I can open it to anyone with a Google Docs account to edit and enhance.
More to come on the trade deficit, which may be a bigger deal than we realized at the end of Bush II’s term.
Reading Levy Institute is not high on the stack.
Levy has made a lot of correct calls on the economy. Wynne godley called 2008 quite early.