I was interested to take a look at the trends in receipts and expenditures of the U.S. federal government over the last 40 years.
The top panel in the graph below plots federal expenditures as a percentage of GDP since 1972. There were a few years when this fell below 20%, but it has averaged about 22% over this whole period and for the last 3 years has been above 25%.
Federal receipts, in the bottom panel, have rarely been above 20% of GDP, and historically averaged about 19%. The difference (22 – 19 = 3) is the 3% deficit the U.S. has maintained on average over this period. For the last 3 years, receipts have been below 17%.
With expenditures in 2011 3.2% higher as a percent of GDP than average, and receipts as a percent of GDP 2.4% lower than average, we had a federal deficit in 2011 equal to 8.6% of GDP, or 5.6% higher than average.
Next consider breaking spending down into its 3 main components: defense, entitlements, and other. The graph below plots each of these as a percent of GDP, with horizontal lines indicating the historical averages. U.S. defense spending at the moment is right at its historical average of 4.7% of GDP, though at one point it had been as low as 3.0%, a value reached in 2000. Spending on categories other than defense and entitlements is also close to its historical average. From a long-term perspective, all the growth in spending has come from entitlements.
In particular, Medicare has gone from 3.6% of all federal spending in 1972 to 15.6% in 2011, Medicaid from 2.0% to 7.6%, and income security, which includes unemployment compensation, Supplemental Security Income, and welfare, has gone from 7.1% to 11.2%. As the population ages and relative medical costs increase, entitlement spending will become even more dominant.
In addition to these long-run trends, it is also interesting to look in particular at the changes over the last decade. Economic Policies for the 21st Century examined what turned the surpluses that the Congressional Budget Office had been projecting in 2001 (the blue line in the graph below) into the actual large deficits (red line). One important factor is that GDP did not grow as fast as CBO had been predicting; the contribution of unanticipated “economic and technical changes” is summarized by the green line. A bigger contribution came from the fact that discretionary spending (chiefly defense) was higher than anticipated by CBO in 2001 (purple line). The tax cuts also made a material contribution.
Here is E21′s calculation of the respective contribution of the various factors.
The implication of a simple look at the numbers should be obvious to any objective observer. To return to long-run fiscal solvency, the U.S. will need both tax increases, defense cuts and significant entitlement reform.
The fact that I don’t hear more people delivering the same clear message suggests to me that we don’t have enough objective observers.
This post was originally published at EconBrowser and is reproduced here with permission.
4 Responses to “U.S. Federal Receipts and Expenditures”
Some of this was covered by John Miller in 2009 at Dollars and Sense magazine: http://www.dollarsandsense.org/archives/2009/1109… —
The "economic downturn" contributed 43% of the deficit increase, then another 43% from the Bush tax cuts, the added military spending, and Medicare Part D. The TARP and Obama stimulus of 2009 contributed 15%. This article says that Medicare, Medicaid, plus SSI and welfare spending has increased since 1972 from 12.7% to 34.4%, almost 3 times. The conclusion here that we need "entitlement reform" is normally attributed to the excessive rise in health care costs relative to everything else. Reforming the medical system would end the deficits. Like every other nation, we need a single payer or a vastly price controlled system. Our per capita expense is $7600/year, the OECD average is $3900/year. But the manufacturing sector is more key, in my opinion. Wages are set for major downward adjustment due to trade imbalances that go ignored. That will affect all income levels and total income.
Fiscal policy has deteriorated since 2001, and members of both parties are responsible.
Short-run fiscal policy that was once counter-cyclical has become pro-cyclical. Procrastination dominates long-run fiscal policy, and the result is an extraordinarily large
debt relative to GDP. It is also possible that slower than projected growth of real GDP has
been partly induced by the large sovereign debt, as has been shown by recent empirical
work on estimating thresholds for debt.
This is good information that deserves more publicity. I would like to see the same charts with a couple of other corrections. For example, I'd like to see what the tax and spending charts look like if you state them in relation to potential GDP, not actual GDP. That would give a better idea of what part of the variation is due to policy changes and what part to cyclical changes. Also, I would like to see them adjusted for demographic changes. To what extent are entitlements growing because policy is getting more generous to older citizens, and to what extent are they growing just because there are more older citizens?
OK, but now it's time to address why the out-of-trend behavior the past 4 years. The baby boomer retirements could be a component, but retirement is a gradual process for a population as a whole so that would be only part. The only other sudden event would be the steep recession from 2007, from which we've yet to emerge. So without tracing that, we have no way of knowing whether the "bubble" in entitlements — remember we extended unemployment insurance, too — will also collapse if/when the economy starts growing more strongly.