Armageddon May Have to Wait

Just how serious is the federal deficit? Has there really been an explosion of federal spending? Is the country on the road to fiscal Armageddon?

You might be excused for thinking the answers are “very”, “of course”, and “undoubtedly”, if judged by the stream of verbal, print, and electronic alarms emanating from issue-mongerers high and low.

Against those many thousands of dire words I’d like to place at least one picture, compiled from data available at the St. Louis Federal Reserve. (The St. Louis Fed certainly has no monopoly on these figures, but they do have some of the best online tools around.)

Here’s the picture. Don’t let it overwhelm you – it’s more interesting than it might first appear. (And much easier to read if you click on it.)

GDP vs Employment vs Deficit

(Click to open a full size version in another window.)

Here’s what we’re looking at, from 1960 to present:

  • The blue line is Gross Domestic Product. It dips in the vertical gray bars, which mark recessions.
  • The brown line is the percentage of population in civilian employment. This employment ratio avoids the phantom changes (or lack of change) in unemployment statistics due to people entering and leaving the labor force.
  • The green line represents federal receipts, mainly tax revenue.
  • And the red line represents federal expenditures.

The first thing you might notice is just how serious the most recent recession has been. The impact to GDP, civilian employment, and federal receipts has been enormous. You might also have noticed that federal receipts are always hurt by recessions, it’s just that they really took a dive with this last one.

Look a little closer. You’ll see that the red line of federal spending began diverging away from the green line of federal receipts during the Reagan years of deficit spending, and you’ll also see that the lines came back together and crossed into surplus during the Clinton years. Beginning with the Bush administration, receipts were driven down for a while with the tax cuts, while spending accelerated with the two wars.

You can see that from 2007 to 2009 the deficit grew rapidly, but primarily due to the recession-depressed receipts. People who lose their jobs pay little or nothing in federal taxes, and a lot of people lost their jobs.

You will look in vain for an “explosion” in spending since 2007 (not counting the one-time TARP). Just a small bump with the stimulus program.

Finally, since the recession bottomed out, the deficit gap between red and green lines has reversed course and begun closing slowly.

So, let’s revisit those questions.

How serious is the federal deficit? Serious enough.

Has there been an explosion in federal spending? No.

Is the country on the road to fiscal Armageddon? Probably not.

But what about the long run? Certainly worth examining, but we need to remember that the present trends are in the right direction, the recovery is still fragile, and the recovery is the single most important factor in keeping those trends in the right direction.

Related: Taxing Matters

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