Monday, July 18, 2011

An Excellent Metric for Historic Comparisons of Government Spending

I highly recommend checking out the CATO INSTITUTE's recent posting on Federal government spending.

In particular, take a look at the data contained on the link to the spreadsheet right beneath the bar chart. I think the data on the spreadsheet is quite illuminating, beyond the "Obama is leading us to disaster" narrative spun by Cato. The President's policies may very well have that affect, but the story is deeper. There is no question that the spread between government revenues (about 14.8% of GDP) vs. what the Federal Government actually spends (about 24% of GDP) is unsustainable and even terrifying. That said, it is not the first time in history.

The data on the spreadsheet goes back to the 1930s, when the government, during the height of the Great Depression was running massive budget deficits; interestingly, the percentage of federal government spending to GDP hovered around 10%, less than half what it is today. Government spending as a percentage of GDP only really spiked up with America's entry into World War II, when at its peak, government spending was over 43% of GDP.

Also, during the peak of the Reagan arms build-up in the 1980s, the spread between federal government spending and outlays was large as well, though still only about half what it is today.

Here are a few take-aways:

1) As a percentage of GDP, federal government revenues are at record lows due in large measure to the still poor economy (a high number of folks are out of work, hence lower tax revenues); and

2) We have had, in modern times (beginning in the 1930s), similarly large budget deficits, though these seem larger and more persistent;  and

3) In each of the past cases, however, the high budget deficits were relatively short-term and the situation was corrected through a combination of reductions in spending and economic recovery; and

4) We had a budget surplus as recently as 10 years ago, which was preceded by a period of several years (in the late 1990s) whereby federal government spending as a percentage of GDP was declining; and

5) In the past,  high budget deficits were adopted to support "great causes", the defeat of Nazism and Imperial Japan and WWII and the defeat of the Soviet Union and its empire. What are our "great causes" today? (It is meant to be more of a rhetorical question; perhaps answered in a future post.)


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