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Federal Deficits are the Result of Rising Expenditures and Falling Receipts
by Bill King
Monday, December 04, 2017

Contrary to the partisan narratives of our two dissembling political parties, federal deficits have been growing steadily since WWII through every administration, with the sole exception of the Clinton administration.  The growing deficits have been the result of the federal government spending more of our gross national output and collecting less.  Here is what the record looks like for each administration.  I have offset the data by one year to account for the fact that each incoming administration inherits the budget for its first year from the previous administration.[i]

Democrats will tell you that the deficits are the result of Republicans cutting taxes and Republicans that they are the result of out of control spending.  Both are right and both are wrong.

First, I suspect most of you will be surprised to know that the amount that the federal government has spent and collected in taxes since WWII has moved in fairly narrow ranges.  During that period the most the government has ever spent of the country's GDP was 24.4% in 2009.  The least was 16.6% in 1965.  For tax collections, 20% was the high in 2002 and 14.6% was the low in 2009 and 2010.

  

 

But notwithstanding that the expenditures and collections have moved in these narrow ranges, the trendlines are clear. The federal government has been spending more and collecting less in taxes as a percentage of GDP since WWII.

The effect on federal receipts and expenditures from the 2008 financial crisis is a notable outlier to the general trend and is a cautionary tale about making sure we avoid that type of crisis in the future.

While reviewing the historical record is always a useful exercise, especially when debunking partisan propaganda, it is probably less helpful in considering where the federal budget is likely to go from here.  That is because we are about to enter a period where the cost trajectory of three programs, Social Security, Medicare and Medicaid, is about to explode.

In 2007, those programs cost about $1 trillion.  By last year, they had doubled to just under $2 trillion and accounted for nearly 50% of all federal spending.  The Congressional Budget Officer (CBO) projects that they will rise to $3.6 trillion in the next ten years.  Of the three, Medicare rises most, more than doubling.  These increases are, of course, driven primarily by demographics as our population will grow significantly older in the next ten years.

By comparison, the total amount the federal government spent on all welfare programs last year was about $270 billion, or 27% of the big three and 7% of all federal spending.  Welfare expenditures are up by about $110 billion over the last ten years (about a 70% increase).  The CBO projects that, based on current programs, welfare spending will be relatively flat over the next decade, rising only about 15%.

One chilling metric is the CBO's projection of the federal government's interest cost.  Because of falling interest rates, there has been almost no increase in the government's interest cost in the last ten years (2006 - $227 billion vs. 2016 - $240 billion).  But the CBO projects that the interest expense will more than triple by 2027 to over $800 billion because of the exploding deficits they expect in the next decade.

Both political parties promote narratives to explain the structural deficit in the federal budget that resonate with their respective constituencies and have a grain of truth but ignore the elephant in the room.  Welfare queens or greedy corporations may contribute nominally to the federal deficit, but it is principally being driven by an aging population with the enormous medical expenses that demographic change will drive.  That is the real inconvenient truth that neither party wants to address because the solutions are hard, complicated and fraught with political peril.


 

[i] All of the data in this article is expressed as a percentage of gross national product.  The gross numbers, because of population growth and inflation, would obviously show much more dramatic increases, but economists almost universally agree that the amount that the government spends and collects as a portion of the economy's national output is the critical metric.




Remembering Jim Guidry November 6, 2018 Election Returns


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