A Fiscal History of the United States

The consensus in Washington these days seems to be that the number-one national problem is our fiscal condition.  I’d venture to say that our number-one problem is actually the rush to the fiscal cliff, but let’s take a look at the history of our debt and deficit to get some context.

It seems like this is the image that the policy makers have in their minds:

This graph shows the annual federal deficit in current year dollars, and it’s a good example of how to use a graph to obscure the data.  It’s of course preposterous to compare the deficit in current year terms over the course of history when the monetary supply and size of our economy have increased concurrently.  Also, the annual deficit is composed of two factors – outlays and receipts – that move quite independently; so looking at the deficit alone will not help to see trends.  This next graph shows the most common way of looking at the data, and begins to address both of these concerns:

This graph shows the US debt held by the public (the sum of all of the annual deficits) denominated by GDP.  This is better a measure because it is cumulative and controls for the size of the economy.  But the three components – outlays, revenues, and GDP – still move semi-independently, so it is not possible to see the individual factors that influence this graph.  Why not look at all three components?  (Click on the image to enlarge.)

Here we can see the deficit as a function of annual receipts and outlays, and in proportion to the size of the federal government.  The debt held by the public, in the lower graph, is the accumulation of the annual deficits, and can be seen in comparison to the GDP.  Notice how revenues respond to recessions, and outlays respond to world events.

Please note that I am still showing current year dollars, but on a logarithmic scale.  The vertical axis progresses not by even increments, but by factors of ten.  This allows comparison across time without convolving GDP.

In the beginning of the century, you can see how World War I led to economic growth and growth in the size of government.  Afterward, you can see how surpluses coincided with recessions.  At the onset of the Great Depression, receipts plummet.  The push toward austerity in 1937 invited a recession, and by reducing revenues actually increased the deficit.  World War II again led to growth in the economy and the government.

In more recent history, you can see the surpluses of the Clinton years were the result of steadily decelerating growth in outlays, and increasing receipts driven by growth in the economy.  You can see the effect of the Bush tax cuts, which were intended in part to prevent the surplus from paying down the debt too quickly.  When 9/11 sparked a recession, they cut far deeper even than expected into the receipts.

The Great Recession again caused receipts to fall off, like they did during the Great Depression, and they were further decreased by the President’s tax cuts.  You can spot the temporary increase of the Recovery Act in the outlays line, but most of the current deficits are clearly driven by lowered receipts.

After 2011, the data are drawn from the President’s planned budget.  You can see that it plausibly projects diminishing deficits without assuming dramatic economic growth.  (I can only conclude they learned their lesson about making overconfident projections.)

The fiscal cliff, if not dealt with, would abruptly lower the planned outlays, and would raise tax rates.  But since this combination is predicted to send us back into recession, the receipts would also fall.  It seems like 1937 is a relevant comparison.

Meanwhile, in the context of this history, I’ll leave it to you to decide how much alarm the current deficits deserve.

Data Sources:

Receipts and Outlays, GDP after 2011: OMB Historicals, Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789–2017

GDP 1929-2011: BEA, Current-dollar and “real” GDP

GDP prior to 1929: CBO, Supplemental Tables F-Box 1-3

Periods of Recession: NBER


9 thoughts on “A Fiscal History of the United States

  1. This was interesting, Trevor! The concept of the fiscal cliff has had me captivated. I’ve been interested to see how this is – or isn’t – addressed by the presidential and congressional candidates, particularly in the final moments of this campaign season (in terms of debates and campaign-trail messaging). I have to say I’m glad, and I’m also really proud of the president taking a hard line approach on the fiscal cliff. I think as he begins his second term, he has a prime opportunity to reset his relationship with Congress, and to assert his economic agenda for the next four years.

    • I agree, Cait. What’s crazy is that some in Congress are so literalist about their Norquist pledge that they will need to wait until after the Bush tax cuts legislatively expire to play ball on tax reform.

    • Thanks, Dave — that’s a great argument from Dean Baker! I agree that the low interest rates right now (negative, in some cases) should be a major factor in the decision to borrow more or less. Perhaps the best way to show this in the graph would be to include total interest payments as a component of outlays on the bottom of the first half?

  2. I think that unlike earlier periods, our deficit is somewhat built in due to our current entitlement State. We tolerated earlier, and relatively much larger deficits (like WWII) because they were temporary. But now we have built in spending that constantly increases the deficit. It can’t keep increasing (relative to the size of our economy) forever. I’m sure you’ve heard it before, but what can’t go on forever won’t.

    • Thanks for commenting, Mike. I agree that the debt can’t (and shouldn’t) continuously increase relative to the size of the economy. But I don’t fully agree that we have a structural long-term deficit right now. Either way, the situation should be clarified during the lame duck session, when they try to tackle the fiscal cliff. Will you be happy if they reach a credible bargain to begin running surpluses in the next 5-10 years, or are you hoping for something more immediate?

  3. No matter what agreement they come up with during the lame duck session to deal with the fiscal cliff, I don’t see that it will include a budget deal that will get us to a balanced budget in a couple of years. Frankly, that wasn’t even on the radar for me. I’m just hoping whoever is the next President will take these issues seriously and come up with a long term plan.

  4. Happy Fiscal Cliff Monday, Trevor! I’m interested to hear your thoughts on the backlash and long-term effects of what theoretically could occur if Congress doesn’t resolve this today.

    Personally, I think something will be passed, at least as a stop-gap – probably what the President was pushing for, with some minor variations. I also can’t see the AARP (or any of the dinosaurs in Congress!) allowing many cuts to Medicaid and Social Security. And, given who the Right is trying to court, they can’t cut Medicare significantly without facing long-term political repercussions from that.

    I do have to say that I’m concerned that this is immediately after the election, and so there isn’t a political incentive for the Republicans to capitulate. I’m also in agreement with the articles I’ve read that state that this would basically push us back a few years, figuratively, in terms of our economic growth. Frustrating.

    Also, I just noticed I could get follow-up comments through email. Sweet.

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