Earlier today, CBO released its latest monthly snapshot on the federal budget. The key things you should know are:
- CBO estimates that the government ran a deficit of almost $1.4 trillion during the first eleven months of the fiscal year (up from $501 billion at this point last year).
- CBO reiterated its forecast that the full year’s deficit will also come in around $1.4 trillion (September is usually a month of surplus because of strong tax receipts, but CBO apparently thinks this September will be close to break-even.)
- CBO’s estimate is noticeably lower than the administration’s most recent deficit forecast of $1.58 trillion. If the final numbers next month are in line with CBO’s projections, some commentators will thus spin the full year deficit as good news (“the deficit came in lower than the administration expected”), while others will spin it as bad news (“yikes, the deficit was $1.4 trillion”). (As noted in an earlier post, CBO’s summer update was a bit complicated to interpret because its headline deficit estimate used different accounting for Fannie Mae and Freddie Mac than the administration used; on an apples-to-apples basis, however, CBO then forecast a deficit of $1.41 trillion.)
- As shown in the following chart, the deficit has exploded for three main reasons:
- Tax revenues fell off a cliff (down 16% or $365 billion relative to last year). The sharpest declines have been in corporate income taxes (down 56%) and individual income taxes (down 20%).
- The financial rescue has required $257 billion in new spending. TARP accounted for $174 billion, while cash injections into Fannie Mae and Freddie Mac accounted for $83 billion.
- Other spending increased (up 7% or $315 billion relative to last year). These increases are spread across many spending programs, but have been most pronounced for unemployment insurance (up 160%) and Medicaid (up 25%).
In addition:
- As noted in previous months, interest payments continue to provide a sliver of good news. Interest payments have fallen by 23% (or $55 billion) thanks to low interest rates and small inflation adjustments on indexed bonds.
- CBO estimates that the budget impact of the stimulus totaled more than $150 billion by the end of August. That’s in line with the figures reported by Recovery.gov.
Donald,
Thanks for that useful and user-friendly chart format. Have you posted a similar chart on factors in the projected 10-year addition to our debt (cumulative deficits) vs. some baseline? That would be a useful visual for discussions of, for example, how much is due to Obama’s planned extension of the Bush tax cuts (in conjunction with continued AMT patches) vs. other factors.
I’ve seen other formats that are helpful, such as this one http://www.washingtonpost.com/wp-dyn/content/graphic/2009/08/29/GR2009082900168.html?sid=ST2009082900227 and this one http://crfb.org/blogs/constructing-current-policy-baseline, but your format would be best for a quick, clear visual grasp of relative magnitudes.
Hi Brooks — Thanks for the links. Nice parfait charts. I haven’t seen one consolidated down like my waterfall chart, but that’s a fun idea. Of course, as with all these charts, a lot hinges on the choice of baseline.
When China passes the U.S. as the world’s dominant economy, you can blame the economists, who parrot the popular wisdom that federal debts are unsustainable and cause recessions, inflations, high taxes and harmful high interest rates. No evidence supports these intuitive beliefs.
Contrary to popular wisdom:
–Fact: We do not need other nations to buy our debt. We do not even need to create debt. Just as the U.S. government has the unlimited ability to create T-securities and sell them (aka “borrow”), the government has the unlimited ability to create money, thus the unlimited ability to “sustain” any size debt.
–Fact: There is no historical relationship between deficits and inflation (See the blog: “Do deficits really cause inflation,” below). Data indicates inflation is more closely related to energy costs, specifically to oil, than to any other factor.
–Fact: In only 15 years, from 1979 through 1994, taxes were cut and the federal debt grew an astounding 500%. This massive, unprecedented money printing did not cause inflation or high taxes. Instead, we entered a long period of economic growth, low taxes and moderate interest rates. Repeating that 500% debt growth would yield a $72 trillion debt in 2024 and an average deficit of $4 trillion — and if history is a judge, the same economic growth, the same low taxes and the same moderate interest rates.
–Fact: All six depressions in U.S. history immediately followed years of federal surpluses. Every recovery coincided with increases in debt growth.
–Fact: All nine recessions in the past 50 years immediately followed reductions in federal debt growth. Every recovery coincided with increases in debt growth, such as we are seeing, today.
–Fact: There is no historical relationship between high interest rates and slow economic growth. Similarly, low interest rates have not stimulated growth.
–Fact: There is no historical relationship between deficits and tax rates. Without tax increases, there is no mechanism for our grandchildren to pay for deficits.
The factually unsupported fear of federal deficits in the U.S., when compared with the lack of such fear in China, is why we will fail and they will succeed.
Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com
Hi Rodger — Two questions for you:
1. In your first item, why doesn’t creating money lead to inflation? As written, it sounds like you are describing exactly what Zimbabwe did, which didn’t work out well, but I am sure that’s not what you mean.
2. In your framework, what are the costs of deficits and who bears those costs? As written, it sounds like you are suggesting there are no costs to deficits, but that can’t be what you mean.
1. Creating money CAN lead to inflation, but in the past 50 years, large federal deficits have not been associated with inflation. To see a chart of this, go to http://www.rodgermitchell.com and do a page search for “there is no relationship.”
I cannot speak for all the countries that have suffered hyperinflation, but in most cases what happened was this: First the country had some inflation. In response the country should have raised interest rates. Instead it printed money.
So it had more inflation, and again in response, printed money. In short, the country “chased” the inflation by printing money, rather than by curing it.
Why the inflation in the first place? Many reasons. For the past 50 years in America, inflation has been more associated with the price of oil than any other single factor.
2. When you say “costs of deficits,” specifically to which cost do you refer? Your question may look simple, but I wrote an entire book on it.
Rodger Malcolm Mitchell