Tuesday, October 22, 2013

Deficit Spending Gone Wild

For the fiscal year ended September 30, 2013, the US recorded the smallest fiscal deficit in five years. At just over $1 trillion, statesmen and economists from across the nation congratulate themselves on a job well done. The sequester and rising tax rates aside, this feat is universally attributed to economic growth (and the resulting tax take on that growth), the Keynesian "prescription" for economic recovery that has kept Paul Krugman's bearded face affixed to a regular column over at the New York Times. Those proclaiming victory over recession quickly point to a reduction in the ratio of deficit to GDP, now falling for the US to a modest 6.55%.  A further sign of our progress in righting the ship.  

From the nosebleed seats at which we climbed to watch prior years' deficits spiral up to $1.4 trillion, this new level of spending beyond our means has to appear humble, noble, if not awe inspiring. Of course, not a moment has been wasted by those in Washington seeking to claim credit for this accomplishment, eager to compare our new economic prudence to those unprincipled nations of peripheral Europe, still wracked by deficit spending. While the US deficits still exhaust more global capital than the next 7 major industrial nations combined, this must all be taken in context, you see.

The US, they are quick to caution, has carefully managed its fiscal deficit down to a rate below that of many third world nations, the UK and of course the European periphery, where in recent years the much maligned Spain and Greece have flagrantly floated deficits of 13.3% and 24.23% of GDP, respectively.

But this has us thinking. Where exactly is it written that government deficits should be measured in relation to gross domestic product (of all sectors of the economy) in order to weigh their significance to an economy (or the prudent management of governmental budgets)? Well, yes, in the treaties creating the EU, where all participating nations pledged to limit deficit spending to under 3% of GDP. But no one paid attention to that, with literally every nation in the EU (including Germany) breaking this promise, often repeatedly. Is GDP the appropriate measure to judge how modest or excessive deficits have become? Or is the measure of deficits to governmental revenue a more appropriate measure of the extent to which a government is leveraging its tax base?

And that's the thing about the trillion dollar plus deficits that the US has racked up in each of the past five fiscal years. It's the amount that the deficit exceeds the revenue base that to us, is so startling. It implies that all things being equal, tax rates would have to increase by nearly 50% to balance the budget. Measured in this light, even the most recent US fiscal deficit of $1.09 trillion places us second only to Greece in quantifying our flagrant mis-management of the Federal budget.