The Treasury Department just released the budget figures for fiscal 2019, and they are mind-boggling:
Revenues increased by 4%, roughly in line with nominal GDP. Spending soared by 8.25%, more than twice as fast as NGDP. The budget deficit increased from $779 billion to $984 billion.
Normally, spending grows faster than NGDP during recessions and slower than NGDP during booms. Thus you’d expect federal spending to be growing at less than 4%/year. It’s very unusual that spending is growing at twice the rate of NGDP during a period of peace and prosperity.
You would expect there to be a lot of commentary about the explosion in federal spending:
What are Republicans saying about the explosion in federal spending?
What are Democrats saying about the explosion in federal spending?
What are economists saying about the explosion in federal spending?
What is the media saying about the explosion in federal spending?
As far as I can tell, the answer to all four questions is, “almost nothing”.
The issues that we should be focusing on are the ones that no one is talking about, not the issues with which the media and politicians are obsessed.
I see lots of recent articles about the need for fiscal stimulus. Do they not know that we are already doing an almost unprecedented fiscal stimulus?
Perhaps people are not talking about this explosion in federal spending because it would be inconvenient to do so. If you are a Republican, then you don’t want to highlight your hypocrisy on the issue. If you are a Democrat, then you want to make the GOP seem like meanies who are unwilling to spend money to help people. If you are a mainstream economist, then you want people to believe that more spending will boost economic growth. (Even though the Fed offsets fiscal stimulus.) If you are in the media, then you follow the lead of Republicans, Democrats and economists. If they aren’t talking about the issue, then it’s not an “issue”.
For instance, neither party is talking about the kidney shortage that kills tens of thousands of people each year due to price controls on kidney donations, so it’s not an issue worth discussing in the media. And neither party is talking about the explosion of federal spending, so it’s like that tree in the forest that no one hears falling.
READER COMMENTS
John Arthur
Nov 5 2019 at 8:21pm
Scott, good post:
Isn’t most of this increase in spending due to the entitlement programs. Then again, Democrats and Republicans passed a spending bill that radically increased spending.
My guess, is people are aware that the US can take a lot of debt on, and are just rent seeking, and are trying to extract all that they can by lobbying.
I hope this bad situation gets fixed quickly, or we are in for a world of hurt.
Scott Sumner
Nov 6 2019 at 12:37pm
Mostly entitlements, but defense spending also rose sharply.
Mark Z
Nov 6 2019 at 2:22am
It seems like the general belief that unusually low interest rates have made borrowing very cheap has left many mainstream economists thinking it’s just not a big concern, as it would’ve been in an earlier time.
But I’m skeptical that the public or politicians really take their cues from economists. Rather, everyone has his/her own grand idea that costs a trillion dollars, and each knows it behooves him/her not to get everyone else thinking about costs. Low interest rates make a nice excuse though.
Scott Sumner
Nov 6 2019 at 12:39pm
Mark, Low rates might be a reason to have a larger debt, but not to spend more.
Thaomas
Nov 7 2019 at 5:06pm
It would be a reason to invest more. More projects will have positive NPV with lower borrowing rates.
Matthias Görgens
Nov 8 2019 at 10:24pm
Government could borrow to put money into an index fund (ie souvereign wealth fund) then?
The pattern we see looks more like borrowing for consumption?
Thaomas
Nov 9 2019 at 11:34am
If we are talking about recession and an extreme demand for liquidity, government borrowing and placing the money into shares in addition to investing in NPV projects makes sense. Borrowing to pay the difference between the market price and the marginal cost of inputs into consumption makes sense, too.
Nick
Nov 6 2019 at 5:59am
Scott, if it were true that societies are willing to take very low or perhaps negative real yields on government securities (that is the government isnt distorting the market through regulation to promote negative real yields), then do you think that the government should borrow and spend (or invest).
It seems completely obvious to me that there is an opportunity here, but that perhaps the mechanics of government are a poor way to exploit it. Generally the government is less good at investing than individuals, but perhaps we could collectively agree on some projects where it does make sense. I’m not a fan of borrowing to spend as i don’t like generational transfers, but I’m open to the case of borrowing to invest.
I will also say that i think all the most obvious cases for investment in such a scheme are in part caused by government regulations themselves. i would rather the government not cause the problem in the first place, but if some branch of government causes it, im not sure its wrong for some other area to fix it. As is said in many posts, the government isn’t a self consistent entity.
Scott Sumner
Nov 6 2019 at 12:40pm
See my reply to Mark.
Nick
Nov 6 2019 at 1:28pm
I think that’s right starting from where we are with the government(s) we have.
What is your impression of norway sov wealth fund. presumably you think norway should wind that down and cut taxes?
Scott Sumner
Nov 8 2019 at 4:51pm
No, I think the Norwegian SWF fund is fine.
Robert EV
Nov 9 2019 at 12:51pm
Scott,
Do you have a problem with the state owning the means of production? Or just with the state managing the means of production? To what extent does the government of Norway use its sovereign wealth fund to do both?
Robert EV
Nov 9 2019 at 12:52pm
Sorry, I phrased the second question as if I already know your opinion. I don’t.
Jo
Nov 6 2019 at 8:26am
And if you divide deficit by outlays you get 22.1%. That is an eye popping number as well. You would think there should be a clear reason to bust the budget like this.
Thaomas
Nov 6 2019 at 11:03am
Wow! I knew we’d been making federal taxes less and less progressive over time, but it is is astounding, that revenues did NOT go up faster than GDP. This means that the structural/full employment deficit, already too high, is growing.
Making the tax system progressive again, ideally with a progressive consumption tax, and reducing the structural deficit are definitely things we should be talking about more.
I wonder how much spending growth is just demographic. Some is not. ACA was a substantial increase in subsidies for health insurance for poorer people. And more is being spent on immigration law enforcement (with low or negative NPV in my POV).
Fiscal stimulus, no, although I think that even with prices of inputs fully reflecting marginal costs, there are still lost of potential public investments that have positive NPVs at today’s long term interest rates and that may be what such calls actually mean . Monetary stimulus, yes. The Price level is still below its 2% trend line starting from the announcement of the 2% supposedly symmetric inflation target.
.
Scott Sumner
Nov 6 2019 at 12:41pm
Tax rates have been reduced.
Thaomas
Nov 7 2019 at 5:11pm
Right. That’s the mechanism by which Federal taxes have become less progressive. Or did you mean that the non-rise in revenue was a one-off? But the structural deficit still became larger.
Yaakov
Nov 6 2019 at 3:05pm
I think this is a classical case of the boy who cried wolf.
For decades now people have been warning from the catastrophic consequences of the deficit and time after time their predictions were proven wrong. While everybody knows this cannot go on forever, people just assume that it can go on for a long time and therefore there is no reason to stop the party.
I have searched many times for a careful prediction of the consequences and time frame of the disaster, but never found one.
Scott Sumner
Nov 8 2019 at 4:53pm
Yaakov, I’ve never argued that it would lead to disaster. And we’ve never before had a fiscal policy like this in America.
Thaomas
Nov 8 2019 at 8:51pm
Right, plus the would criers only cry when Democrats are in office.
Strictly speaking one should not be crying about “deficits” at all but about the taxing and spending decisions that create the deficit. A deficit created in order to finance activities with positive NPV or a deficit created by reducing a tax that was seriously impeding growth should be applauded.
But if one think that most spending is not investment in high NPV projects and most taxation is not seriously impeding growth, I think you get to a recommendation of a fairly small deficit or surplus during full employment.
A big structural (full employment) deficit is negative public savings and probably reduces aggregate investment and future income growth. That non growth, by the way, is the “burden” that the deficit generation leaves for its decedents.
Lorenzo from Oz
Nov 6 2019 at 6:27pm
Great post. But there is a larger pattern here.
The US has a legislated two Party system. (Left-cynics say that if the Soviet Communist Party had divided itself into two wings who disagreed on abortion, it would still be in power.)
The UK has working class voters who will never vote Tory, so the Labour Party can take them for granted (but we will see how well the Brexit Party does in such seats on Dec.12).
Thomas Piketty has pointed out that politics has become dominated by a struggle between an educated (human capital) elite on the centre-left and a business (commercial capital) elite on the centre-right. Which leaves working class voters trying to work out which side of US politics will betray them least.
http://piketty.pse.ens.fr/files/Piketty2018.pdf
In Australia, compulsory voting and preferential voting means you cannot drive groups away from voting, but must aim for 50%+1. So working class voters can’t be ignored.
In Canada, class voting is a lot weaker than in the UK, and the Conservative/Liberal/NDP/Quebecois struggle also means that significant slabs of voters cannot be left out.
Australia and Canada have high migration policies whose content minimises any costs, and maximises any benefit, to local working class voters. Migration is a peripheral issue in politics, provided there is border control. (Remembering that the benefits of migration go first overwhelmingly to migrants and then to the holders of capital.)
UK and US have much lower levels of migration, but there is very little effort made to ensure migration minimise costs, or maximises benefit, to local working class voters. There are much higher levels of alienation and polarisation in politics.
If politics becomes dominated by the interests of capital (human or commercial) in a way that leaves working class voters largely frozen out, politics becomes increasingly dysfunctional. A process that, in the US, the dominance of donor class preferences intensifies. Indeed, political rhetoric tends to become more febrile the more intense the gap between donor preferences and voter base becomes as an attempt to cover the gap. (The Republicans and British Labour being cases in point, though the Democrats seem to be more than catching up.)
So, fiscal policy is part of a more general pattern.
Thaomas
Nov 7 2019 at 5:20pm
There is a lot of truth historically, but it does not explain how the interests of the commercial class which ought to favor secularism, immigration, freer trade, dealing with climate change, and lower deficits got hijacked by the current Republican party’s position of theocratic, xenophobic, mercantilistic fiscal irresponsibility
Brian
Nov 6 2019 at 6:33pm
“If you are a Republican, then you don’t want to highlight your hypocrisy on the issue. If you are a Democrat, then you want to make the GOP seem like meanies who are unwilling to spend money to help people.”
Scott,
Perhaps, but looking at previous numbers it appears that spending only went up by 3.1% the previous year. A more likely explanation may be that split government (Trump/Senate vs. House) means that no one can agree to pass a budget without giving both sides what they want. Since each side has different spending priorities, that leads to large increases in overall spending.
Scott Sumner
Nov 8 2019 at 4:55pm
That’s consistent with what I said.
Benjamin Cole
Nov 6 2019 at 6:46pm
People are also not talking about how the national debt can be purchased back through quantitative easing, except for individuals such as Stanley Fischer.
The track record indicates quantitative easing does not lead to inflation. Japan, Switzerland, and the United States are all examples of where large amounts of quantitative easing did not lead to inflation.
In contrast, it costs about $2,500 to rent a one-bedroom apartment in Los Angeles for one month, a situation common up and down the West Coast and in a few other major metropolises. This strikes me as a real and major serious issue, which results in real and serious declines in living standards. This is not a theory, this is what you can see in real life.
The two political parties, and the Washington establishment, should be devising plans on how to build not tens of thousands, not hundreds of thousands, but millions of housing units along the West Coast and in a few other major metropolises.
Brian Donohue
Nov 7 2019 at 3:58pm
The only bout of anything approaching sanity in public finance this century was 2013, kicked off by the fiscal cliff.
Let’s do that again.
Scott Sumner
Nov 8 2019 at 4:55pm
Agreed.
Comments are closed.