Historical Overview of Federal Finances: Background

There is no getting around it, 2012 is a federal election year. The bad news is because New York is not a swing state, we already know our votes for President will be nothing more than symbolic. Unless we are in swing districts, the same may be said of our votes for Congress. The good news is we will thus be spared the special interest-financed cavalcade of lies, distortions, and “culture war” irrelevancies that constitute political campaigns. You don’t have to know that much to be unable to listen to anything that any of them say without getting disgusted.

Without a meaningful vote, and unwilling to listen to the meaningless BS, I’ve decided to participate in the election by presenting some facts. Facts about how much money the federal government has taken in, and spent, by category, as a percent of its economy, during the recent epoch of political history. That epoch began with the election of Ronald Reagan as President, which ended an epoch that began with the election of FDR. With the Room Eight attachment function still dead, the site owners have posted an Excel spreadsheet, with a series of worksheets and tabbed on the bottom, at this location. The background required to understand it follows in the rest of this post; my view of what it means will follow thereafter.  Download the spreadsheet, print out the graphs and tables, and read on. 

First let’s talk about where the data comes from and what it is. In the “download” worksheet (see the tab at the bottom, far right) you will see a series of tables on federal revenues and expenditures, based primarily on the 2008 Statistical Abstract of the United States. In a tremendous piece of public service, during that year the Census Bureau not only published its usual tables on the status of and trends in this country but also, in the online version, went back as many years in the past as possible for a long-term view. I used those worksheets to produce a previous analysis of federal finances for the 2008 Presidential campaign.

To update the series, I incorporated data from the 2012 Statistical Abstract of the United States, which is unfortunately planned to be the last of its kind. Because Americans prefer to be told what they want to hear, rather than knowing about reality. Good data tends to lag, and budget data is no exception. I only recently was able to compile, analyze and post Census Bureau data on state and local finances for fiscal 2009, and that data is subject to revision. On the federal level, the fiscal 2009 budget may be credited to former President George W. Bush, since the federal fiscal year runs from October to October.

To get even preliminary fiscal 2011 data for the Obama Administration, I had to follow the link from the Statistical Abstract of the United States to the federal Office of Management and Budget, where they had the same tables as the Census Bureau through 2011. The data for fiscal 2010 and 2011 is described as “preliminary.” I also had to download data directly from the Bureau of Economic Analysis to get the latest GDP numbers. Both the federal budget data, and the GDP numbers, remain subject to revision. In fact the latter has changed from the time I started working on this project, but I was able to get the new numbers in.

To the left of the “download” tab you will see the “Per $100,000 of GDP” tab. For each year from fiscal 1978 to fiscal 2011, this spreadsheet shows how large each category of federal revenue or expenditure was relative to the size of the entire U.S. economy. I used the “per $100,000 of GDP” measure rather than percents because this is a detailed table, and many of the categories are small. For example, in FY 2011 the federal government spent an estimated $30 per $100,000 of GDP on Indian Health, according to the table. That would be just 0.03% of GDP, or three hundredths of one percent, which might be hard to read. Thus, lots of detail is there for those who want it.

But this series of posts is mostly based on data in broader categories, as in the “Simplified Percent of GDP” worksheet. That worksheet contains all the years, but for fewer categories, and is used to make the various charts in the spreadsheet. Those charts include vertical lines to show which administration was in office when the federal budget was passed, or “passed.”

Changes in federal revenues and expenditures as a percent of GDP, however, do not result solely from the decisions of the President and his advisors. Congress modifies the President’s budget proposal, and at times may be even more responsible for the changes that result.

Ronald Reagan’s last two budgets, for example, were less “Reaganite” than the first since the Democrats retook control of the Senate in the 2006 election, and thus controlled both houses of Congress. For the Fiscal 1995 budget President Clinton’s Democratic Party controlled both houses of Congress; for the next budget the Democrats controlled neither thanks to their election losses in 1994. When the Democrats lost the Senate in the 2002 election, President George W. Bush was given free range with Republican control of both houses of Congress starting with the fiscal 2004 budget, but had to deal with a Democratic congress for fiscal 2008 and 2009 after election losses in 2006. President Obama’s “free range” lasted two years – somewhat less if you believe that the near government shutdown of August 2011 brought fiscal 2011 to an end two months early.

The economy, moreover, has a greater effect on federal revenues and expenditures as a percent of GDP than the politicians on either end of Pennsylvania Avenue. After all, for all the battles in Washington most federal tax laws and programs remain about the same from year to year.

During recessions, federal tax revenues plunge as a percent of GDP even without any tax cuts, because corporations don’t make taxable profits and rich people don’t record capital gains taxable under the federal personal income tax. It is not uncommon for corporations and rich people to pay no federal income taxes at all during such times, because their income net of previous losses falls to zero. With some of the investment losses deferred for tax purposes, in fact, federal tax revenues can remain depressed for a few years after a recession ends. Then, when the previous losses are “used up,” federal tax revenues can soar as a percent of the economy as tax payments by corporations and the rich kick in.

The economic cycle also affects the spending side of the federal ledger. As people become poor or unemployed, they also become eligible for a host of federal programs of the needy, such as food stamps, unemployment insurance, Medicaid, and (if they are re-employed at lower pay) the Earned Income Tax Credit. Some older workers who might have otherwise waited to retire instead decide that since they are unemployed they will start collecting Social Security as soon as possible. All these factors increase federal spending in recession even as tax revenues fall, a process that until recently was thought of as an “automatic stabilizer” for a troubled economy. Some of these increases in spending will be naturally reversed if and when the economy improves, people get jobs, and incomes rise. Or at least that was the case in past recoveries.

The business cycle affects the GDP portion of the “percent of GDP” equation. Federal spending can increase as a share of GDP in recession even if it does not increase in dollars, because GDP falls. Similarly, decisions to increase federal spending can be hidden as a percent of GDP during booms, because GDP is temporarily rising faster than spending. The actual spending increase showing up as a burden when the economy turns south.

Some neutral observers try to use sophisticated models to adjust for the business cycle, and present data on “structural” federal revenues, expenditures, and deficits independent of the economy. It is because of a large “structural” deficit that the pro-free market Economist magazine “endorsed” John Kerry for President in 2004, evidently holding a barf bag as it did so (that’s how the endorsement read). Though the actual budget deficit was not high as a share of GDP at the time, objective observers knew that the budget deficits the Bush Administration was running despite good times would turn truly massive in bad times.

To adjust for the business cycle and calculate the “structural” level of revenues, expenditures, and debts, however, one must first make assumptions about what a “typical” year for the economy, what the average year over the course of the business cycle, is. Those assumptions are nothing more than that, and have a huge effect on the output of the analysis. Will the U.S. economy grow by an average of 3.0% per year, with 65.0% of its adults employed? Or does our aging population mean that the U.S. will follow Japan into drastically lower growth and employment levels than in the past, with an average GDP gain of 2.0% or less and perhaps just 60% of adults working? In the former case, the U.S. might recover from a typical recession, but in the latter it may face a fiscal disaster.

The political sleazebags generally manipulate the data to deceive people, comparing boom years with bust or vice versa to make the current situation look particularly good or bad. One should not listen to anything said by any politician, campaign, or interest group. But doing the opposite – trying to identify comparable economic years to adjust for the business cycle – is not easy, and by shifting assumptions political types can mislead as well.

At the bottom of the “Per $100,000 of GDP” and “Simplified Percent of GDP” worksheets, I have included economic data on real (inflation-adjusted) GDP, total employment, and control of the White House and Congress for each year from 1978 to 2011. Using this information, and my memory of when certain major policy changes associated with each Administration were passed, I attempted to select a single “representative” federal budget for every President from Carter to Obama. The last time I did this analysis, in 2008, I tried using the best economic year for each President. The problem was that president George HW Bush didn’t have a good economic year; his Presidency was fully occupied by cleaning up the financial messes of the previous Reagan Presidency. President Obama will likely end up in the same boat, at best.

The data show the unique awfulness of the Great Recession. Unemployment rose by more in the early 1980s recession under President Reagan, but employment fell much less. The unemployment rate rose mainly because the last of the Baby Boomers and stay at home moms were flooding into the labor market, and there weren’t enough jobs to accommodate them all. The early 1990s recession hit the Northeast particularly hard, harder than the Great Recession in fact, but it was mild in most of the country. Measured year-to-year GDP didn’t even fall in the early 2000s recession, and employment fell just a little more than in the early 1980s. In the late 2000s, however, GDP plunged from 2007 to 2009 and employment plunged from 2007 to 2010. Nothing like it has happened since the 1930s.

One key question in the fiscal outlook for the U.S. is whether this is a recession like other recessions or the end of an economic era and the start of a new, worse era. Arguing for the latter is this chart on total (public and private) U.S. debts as a share of GDP. Total U.S. indebtedness was relatively flat at about 150% of GDP from the 1950s through the Carter Administration. Since then debts have soared, and the federal budget deficit is just one small part of the reason.

Consumer debts have soared, with people running up their credit card limits, borrowing rather than saving for cars, and borrowing for college. Mortgage debts have soared, as people stopped paying off their mortgages and burning the paperwork in parties when they finally “owned” their house, and started refinancing and spending any accumulated home equity. Corporate debts soared as corporate raiders and private equity firms took over companies, had them borrow, took out the proceeds, and left them burdened and bankrupt. And of course the federal debt has increased, with state and local debts and unfunded pension obligations also increasing.

Total U.S. debt soared starting in the administration of the popular President Reagan. That was when the U.S. first started running a massive trade deficit, and shifted from being the world’s largest creditor to the world’s largest debtor. After the austerity of the 1970s, Americans seemed to like buy now and pay later. In the 1984 Presidential election candidate Walter Mondale harped on federal deficits, but he was out of touch with the new values, and Americans were running up debts in their own lives, too.

Total U.S. debt leveled off briefly during the latter years of the administration of the unpopular President George HW Bush, who was thrown out of office after one term, and the early years of President Clinton, who was unpopular at the time as the huge losses in Congress in the 1994 election showed.

But then total U.S. debts began to rise even as the federal deficit shrank – indeed soaring private debts and the associated surge of tax revenues were part of the reason the federal government was able to balance its books in the late 1990s. President Clinton became more and more popular as total debt went higher and higher, was re-elected in 1996, and was very popular as he left office in 2000.

During the administration of President George W. Bush, total U.S. debt soared again, and Bush II was popular and re-elected as well. While the Economist tut-tutted about his fiscal policies and the housing and stock market bubbles, most Americans were pleased with Bush’s buy now, pay later style, objecting only to the two wars.

By the end of the Bush II administration, total U.S. debt had soared from about 160% of GDP in the late 1970s to 385% of GDP. If there average interest rate were just 5.0%, and it has been much higher in the past, Americans would collectively have to earn 10.0% more than they spent just to pay for the increase in debt over 30 years. And American’s don’t “owe it all to themselves,” in the phrase that some people used in the past. They owe it t the Chinese, the Japanese, the Arabs, the Europeans, to everyone else after years – decades — of trade and current account deficits.

Now you might have heard that recently, in the past few years, the federal budget deficit and federal debt have soared to levels unimaginable not long ago, and that is in fact the case, as will be discussed later. But if one looks at total U.S. debts, public and private, they find that since President Obama took office they have been falling. In fact, in the past few years total U.S. debt has fallen significantly for the first time since at least the early 1950s. And, not surprisingly, President Obama has become unpopular. So has Congress, and business, and everyone and everything else.

Because falling debt has been very painful. Most believe, in fact, that if the federal government wasn’t bankrupting itself to keep the economy alive, we would be in a Great Depression. And yet all that federal debt and all the economic pain of the past four years has barely made a dent in the debts that Americans, individually and collectively, piled up over nearly 30 years. We are down from 385% of GDP to 355% of GDP. There is a debate, in fact, if most Americans would have been better off in the long run if the Great Depression II were allowed to occur, because it has been postponed at great cost rather than avoided. Because our debts are simply too big to be repaid in money that is worth anything like what our money is worth today.

One thing is for sure. The soaring level of total U.S. debt, public and private, shows that most Americans have had the opposite values that I have over the past 30 years, when it comes to the relative value of the present and the future. The result is good news for my personal situation, but bad news for our collective future, my community, my country, and my children aside from the advantages we can afford to give them. Things will have to get much, much worse for my immediate family to be affected by what has been done, and by that point things will be much, much worse for those less well off. But that doesn’t mean that after 30 years of watching this happen, I’m not really pissed off.

With this background, I selected FY 2011 as the representative year for the Obama Administration. It is the latest available or (since it is preliminary data) somewhat available. In that fiscal year the recovery was just starting to take hold, but the budget reflected Democratic control of both houses of Congress. GDP and employment growth were weak, but at least both were positive. GDP had recovered the losses due to recession, but employment was (and is) deep in the hole.

To compare with that year, I selected FY 2004 for the administration of George W. Bush. Then, as in FY 2011, the economy was just pulling out of recession rather than booming or crashing. GDP was rising faster than in FY 2011, but employment was rising more slowly. The Republicans controlled both houses of Congress, the Bush Tax cuts were in place and the two wars were on, though the Medicare Prescription Drug Plan was not yet implemented (it had passed in 2003).

I chose FY 1995 for President Clinton, rather than any of the later years of his Presidency. Most of the later budgets were negotiated with Republicans in Congress, and took place during a stock market bubble that generated a false sense of prosperity – and lots of excess federal revenues. In 1995, in contrast, the country was still pulling out of the early 1990s recession, and GDP and employment growth were moderate. As noted, Clinton had a Democratic congress for the 1995 budget. Clinton had tried to get health care reform passed, and though he started trying to cut the budget deficit before the Republicans took Congress, he had not yet said “the era of big government is over.”

Fiscal 1993 is the best federal budget year available to represent President George HW Bush, though he was out of office for most of it, because 1993 was the best economic year of his administration. The budget was negotiated with a Democratic Congress, but that was true of all of this Presidents’ budgets. GDP and employment were growing as recovery took hold, but not enough to ensure Bush’s re-election, in large part because H. Ross Perot siphoned off the votes of voters concerned about federal budget deficits. A deal to raise taxes and cut spending was, in fact, one of this President’s greatest achievements, but one that would be reversed by his own son.

I chose FY 1983, the year I graduated from college into unemployment (as young people are doing today), as the representative year for President Reagan. His tax cuts (and, for working folks, increases) were already in place, his defense build-up was underway, and his cuts in other spending were also in place. The economy was starting to recover from the early 1980s recession. Employment was lower in 1983 than in 1982, but it started to pick up late in the year, and GDP was growing strongly. Thus 1983 year is similar to other post-recession “jobless recovery” years. Although the recovery was just starting, enough people sensed it and Reagan was able to run in 1984 on a “Morning Again in America” platform. Presumably President Obama is hoping that since FY 1983 was similar to FY 2011, the improving economy of 1984 will be repeated in 2012.

Like Presidents George HW Bush and Obama, there really wasn’t a good economic year of the Carter Presidency, despite the strong economic and GDP growth recorded in 1979, which I chose as the baseline year of the analysis. With Baby Boomers flooding the labor market (I’m near the very end of the Baby Boom and graduated from high school that year), the economy was not keeping up, and while job growth was strong GDP growth was not – leading to inflation.

Those who weren’t around for the Carter Administration may be surprised by how low federal spending was relative to GDP, and may not remember why Carter, as a sitting Democratic President, faced a strong primary challenge from Senator Edward Kennedy. Carter was a fiscally conservative, balanced budget President, the last “pa now sacrifice for later” President, and he faced opposition from a Democratic Congress throughout his administration. Kennedy’s challenge was the last hurrah of the political viewpoint that had expanded the New Deal into the Great Society in the 1960s, an expansion Ronald Reagan’s Presidency would reverse.

To see how things have changed based on these representative budgets, in somewhat similar though hardly equal economic years, print out the “Output Tables” worksheet, which I hope (but can’t be sure) will print neatly. Some remarks based on this table, and line charts for all the years, will follow in later posts.