Mr. President, Here’s that Balanced Approach You Keep Demanding

Dan Mitchell

by Dan Mitchell

Posted Jul 16th 2011 at 7:50 am

At his press conference Friday, President Obama repeatedly said that a “balanced approach” is needed to deal with the fiscal situation.

Here’s a chart based on those OMB and CBO numbers.

The White House has obviously poll-tested and focus-grouped that phrase. But just because it’s gimmicky, that doesn’t mean balance is a bad idea. So I’ve decided to take the President’s challenge.

I want to know why America’s fiscal situation is so out of whack. I’m willing to take a dispassionate look at the numbers. And if those figures show that the President is right, and that “unaffordable tax cuts” have caused higher deficits, then I’m willing to support higher revenues (after all, I am a pragmatic, middle-of-the-road guy).

My first step was to go the White House website and track down the historical data from the President’s Office of Management and Budget.

Those numbers show that federal spending, on average, consumed 19.8 percent of GDP from 1950-2000.

Tax revenues, by contrast, have consumed an average of 18 percent of GDP.

If my math is correct, that means deficits averaged almost 2 percent of GDP over that period.

To determine why deficits are higher today than that long-run average, I decided to look at what spending and revenues will be over the next 5-10 years. I could have picked this year, but that seemed unfair since the economy is still weak, which causes abnormally high spending and unusually low revenue.

Moreover, the spending figures would be artificially high because of wars that we are told are soon coming to an end.

Additionally, everyone is talking about 10-year plans, not fixing the problem overnight, so looking at the 5-10 year figures makes sense.

And, to expose any smoke-and-mirrors by the GOP, I also will assume the 2001 and 2003 tax cuts are made permanent. That way, we’ll know the degree to which Bush’s tax cuts are responsible for additional red ink.

So I went to the Congressional Budget Office and found the relevant data (Tables 1.1 and 1.2, along with Table 1.7).

I discovered that tax revenues between 2016 and 2021 will average about 18.2 percent of GDP. And that’s assuming, as just noted, the 2001 and 2003 tax cuts are made permanent.

I also found that the burden of federal spending will average about 23.6 percent of GDP during that same period.

So let’s see what we should do if we want to satisfy the President’s demand for a balanced approach…hmm…

Tax revenues will be 18.2 percent of GDP, slightly higher than their historical average of 18.0 percent of economic output. So we can safely conclude that revenues in general (and “unaffordable tax cuts” in particular) are not responsible for higher levels of red ink.

Now let’s look at the outlay side of the fiscal ledger. Federal spending is projected to consume about 23.6 percent of GDP, substantially higher than the long-run average of 19.8 percent of economic output.

In other words, if we want to assign blame for higher deficits, the increase in federal spending deserves more than 100 percent of that blame.

Which implies, if we want to be balanced, that spending restraint should be more than 100 percent of the solution.

By the way, lest anyone think that I cherry picked historical data, I deliberately decided not to use 1946-2010 data, which would have made my point even stronger. Over that longer period of time, revenues average 17.7 percent of GDP and spending averaged 19.7 percent of GDP.However you slice the numbers, America’s fiscal policy problem is too much spending. The solution, as I explain here, is to limit the growth of the federal budget.

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One Response to Mr. President, Here’s that Balanced Approach You Keep Demanding

  1. The biggest problem with this whole thing is while the debt is a serious issue it is really only the symptom of the bigger problem. You hit the nail right on the head in that it is the “Quantitative Easing” – printing more money and quietly slipping it into the economy that is the problem.

    We have inflated the amount of money in circulation over 20 times since 1972. In 1972 there was only about $500 billion of currency in circulation according to the St. Louis Fed. Today there is over $10 trillion again according to the St. Louis Fed. Many others say the amount is higher, some as much as $14 trillion. Estimates of the total amount of money held in derivatives, exceeds $1 quadrillion or one thousand million-million…

    The debt is just the after-effect of the years of constantly increasing the currency regardless of the real value of the US’ assets. It was important to drive up housing as that is the tangible asset that banks use to leverage 10 to 1 against, under the fractional reserve system we and most European countries use.

    The real problem is our assets are not worth the amount of money we have in circulation. If you project the amount of money we would have today using the growth rates prior to 1972 we should have an economy with about $4 trillion in total value not $10 to $16 trillion as we have.

    Finally, I keep hearing that China holds most of our debt, but China actually holds about $1.1 trillion of our debt, and our total debt is between $14 and 16 trillion. Then how can China hold the majority if it is less than 6%? Who holds the rest? Some is other foreign debt totaling about 1/3 of the debt but the rest is the key point. Well the answer for the rest all of us – U.S. of A. taxpayers. Remember if you don’t pay taxes then you’re not responsible for the debt are you? And for most of the wealthy who invest in treasuries they are also the ones paying the taxes to pay the interest.

    Clearly – a strange system to me!

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