Vanishing Austerity, Lies, and Water Lilies

Cartoon by Jim Gibson

As we approach a new silly season wherein Washington turns its sights once again to fiscal farce, it is good to look at some numbers. The usual actors will despair of the unfairness of austerity and will no doubt quote half-correct and partial figures to explain why renewed fiscal stimulus is urgently needed to save the US economy. And naturally, much will be said about the roles played by government changes in tax revenues and spending. The truth is that the great majority of temporary austerity has come through changes in taxes and it is difficult to find any significant reductions in government spending from here to eternity. The numbers show that there is already plenty of government spending stimulus in works. It is hard to fathom a story of even more.                                           

To see the fiscal policy contributions more clearly we need to use numbers from a special Congressional Budget Office report about Automatic Stabilizers http://www.cbo.gov/publication/43999 

Numbers I quote below are taken from a spreadsheet associated with this report. A special report is necessary since the usual published federal government budget numbers reflect a mix of the impact of both (1) intended policy and (2) the effects of the economy on tax revenues and spending. For example, in 2009 when the economy slumped – unemployed workers automatically paid less tax while government spending increased to pay those newly eligible for unemployment insurance and other social programs. In 2009 without any legislation or government action, these automatic changes in spending and tax revenues amounted to $305 billion. The deficit widened by $305 billion before we took any policy actions into consideration.

The government did enact legislation in 2009 to reduce tax revenues by $165 billion and increase spending by $484 billion. These intended policy changes added another $649 billion to the government deficit in that single year. That $649 billion is the part that we identify as stimulus.  The total change in the government budget of -$954 billion was composed of a cyclical part (-$305 billion) and an intended policy part (-$649 billion).

This coincides with our understanding that intended fiscal policy contributed a very large stimulus at the onset of the recession that began in 2008 and ended mid-2009. The first column of the table below shows that after 2009 the published deficit figures show improvements (the column reports changes in the budget and the positive signs indicate improvements or smaller deficits) in the deficit until 2016 . Except for 2011, each year shows a positive number – meaning an improvement in the government budget deficit. 

In the years between 2011 and 2015, the cyclical or automatic impacts do not amount to much – most of the measured changes are the result of intentional policy. Between 2011 and 2015 the measured deficit is improving largely because of policy changes.

You might think this is because the government cut spending. But the table shows that the intent of government was to increase spending by a total of $380 billion in those five years. So apparently the improvements in the budget did not come through spending reductions. Intended changes in government revenues totalled $1,179 billion over those five years. Tax legislation explains the budget improvements.

My friends tell me that the world will not end in 2015 and it is interesting to see what the CBO envisions for 2016-2019 with regards to the intended impacts of legislation. The improved budget situation reverses itself. In all three years the deficits worsen. While the usual published numbers (in the first column) show a mild reversal – it is mild only because they are assuming a strong economy that will improve the deficit by a total of $350 billion in three years. This sanguine haul of bounty is not enough unfortunately to offset the planned changes to the budget that totals increased deficits of $525 billion. Somehow the horse got out of the barn. While 2016-2019 does show a few extra bucks coming into the treasury via taxes, the overwhelming reasons for the return to larger deficits is a cornucopia of spending – a total of $769 billion of spending added in just those three years.

This fall you will hear all kinds of stories about how we bit the bullet and reined in runaway government spending as we took control over national deficits and debt. These same politicians and economic gurus will tell us that while we need to responsibly manage our national debt in the long-run, our weak economy demands much needed stimulus. A similar sad story comes from Mr. Bernanke at the Fed. Just let us water the flowers a little longer and they will start to bloom!

But it is all a lie. Unless our flowers are water lilies we are in a lot of trouble. We have done nothing to approach our fiscal problems. We had a sort of short-term austerity that came largely from higher taxes. Spending was not cut. In 2015 spending will roar back and threaten our finances once again. A stronger economy will cloud some of these facts because tax revenues will automatically climb. But in the oft chance that the economy grows slower than forecast by the CBO, the publicly recorded numbers will reflect even worse deficits than the tables now show.

All the figures below are changes in the given year . The Rev and Spend columns have cyclical changes removed from the measured changes in government revenues and spending, respectively. These are intended policy changes.

Def	CycDEF	PolicyDEF	Rev	Spend	Year
-954	-305	-649	-165	484	2009
119	-67	186	120	-66	2010
-6	8	-14	142	156	2011
210	23	188	138	-50	2012
244	-36	280	296	16	2013c
229	-22	251	315	64	2014c
186	92	94	288	194	2015c
-46	166	-213	67	280	2016c
-59	142	-201	44	245	2017c
-70	41	-111	132	244	2018c