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.
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