What’s really behind that $1.3 trillion deficit?

October 25, 2010

The Treasury Department reported on Oct. 15 that the deficit in fiscal 2010, which ended Sept. 30, was $1.294 trillion. That’s less than FY 2009’s $1.416 trillion, but it’s still really really big. Why is it so big, though? Is it because of all that stimulus and bailout spending? Or is something else going on?

To find out, I created a fantasy world. I figured out how fast federal spending and revenue grew over the last business cycle, from 2000 through 2007, and calculated where we’d be today if those growth rates had continued through 2010. I was originally motivated to do this for a commentary that’s supposed to air tomorrow night on Nightly Business Report. But I’m thinking there’s not a huge overlap between Felix Salmon readers and Nightly Business Report viewers, so I’ll go ahead and share what I learned.

In my no-financial-crisis, no-bailout, no-recession, no-stimulus scenario, spending kept growing at 6.22% a year, and revenue kept growing at 3.45%. You can see from the difference between the two numbers that this was an unsustainable path. But it clearly could have been sustained for a few more years.

Where would it have left us in fiscal 2010? With $2.843 trillion in federal revenue and $3.270 trillion in spending, leaving a deficit of $427 billion. The actual revenue and spending totals for 2010 were $2.162 trillion and $3.456 trillion. So spending was $186 billion higher than if we’d stuck to the trend, and revenue was $681 billion lower. In other words, the giant deficit is mainly the result of the collapse in tax receipts brought on by the recession, not the increase in spending. Nice to know, huh?


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Interesting info Justin. Thanks for appearance here as well.

I don’t think running an OLS regression is the best way to do this, however. Cyclical vs. structural spending is also a critical factor to see whether our deficit will go away post-recession or if it will persist.

Posted by MRLAMF | Report as abusive

The “collapse in revenues” is at least partly due to stimulus measures passed in response to the recession. Much of the rest stems from the Bush tax cuts that were passed but never funded.

We had some very large deficits in 2004-2007 as well, perhaps masked by people recognizing capital gains while the tax rates were low.

Posted by TFF | Report as abusive

Justin —

Your entire point is like this:

Joe loses his job and finds a new one paying half as much and yet continues to sustain and even *increase* his spending.

Is Joe’s job loss the reason for his troubles? Um, yes, compounded by the fact that Joe is a complete idiot for spending like nothing happened.

The solution for the US is the same as that which Britain is following now and that the IMF has given to all of their many past ‘clients.’ Fiscal austerity (especially long term) plus devaluation. The fiscal austerity assures sustainability while enough money printing avoids a deflationary spiral.

Posted by DanHess | Report as abusive

Too bad Pre-Recession Tax Receipts (2002-2007) were accomplished due to lax and and easy lending so homeowners could use their homes as ATM machines to fuel a phony economy.

Until the root of the problem is understood.. there will be no solution.

Posted by lvrealestate411 | Report as abusive

Mr. Hess, your entire point is missing the obvious.
Joe loses his job and finds his new one paying half as much. He goes on the dole as the social safety net kicks in, increasing gov’t expendtitures, while at the same time his income drops through the floor, even as his bills remain the same. When the government makes noises about raising taxes and cutting expenses, Joe, Moses, Fred and Ameil take to the streets pointing at one another, and say, cut his benefits, not mine, and tax him, not me!!!
And so nothing gets done.


Posted by REDruin | Report as abusive

– Red

You have it totally backward. In fact, our public is very upset about fiscal irresponsibility, but our political class prefers only red ink.

Witness the difference between America and say Britain or France. Those nations are actually run by grown ups, who make difficult decisions in the name of being responsible.

Our political class, led by the hardened and radical left, but abetted by the right, has no intention to practice fiscal responsibility. We could learn a thing or two from world leaders just about anywhere.

Posted by DanHess | Report as abusive

In the last 50 years, the only Republican President not to run up a bigger deficit at the end of his term than before was Nixon. When Bush took the world to war in Iraq under false pretences, any criticism was labelled anti-American.

Now there’s a Democrat President the Republicans are doing everything they can to object, block and spread discontent, much of which is based on lies. Have these Republicans forgotten that the crisis developed on their watch, and that the Democrats were voted in to dig the US out of the hole they had inherited from Bush? Have they forgotten that Americans are best when they pull together, not when they fight amongst themselves?

For a European looking in, all I see is self-destruction, self-interest, and a level of partisanship that cannot lead to anything good. I’m becoming increasingly worried about investing in any US assets or USD denominated funds. It really does seem like the GOP has become “The Nasty Party” that puts its own success ahead of that of the country.

Posted by FifthDecade | Report as abusive

FifthDecade —

You are right that spending under Bush was quite out of hand. He is no longer our president.

“Democrats were voted in to dig the US out of the hole they had inherited from Bush”

Exactly. So imagine the dismay Americans feel when the solution to ‘dig the US out of the hole’ is to grab a bigger shovel!

Americans are very remorseful about their spending spree in the ’00s and they don’t want any more debt. Is it any wonder they are so upset that the government is trying to keep the party going?

Folks like to hold Clinton up as an example of fiscal rectitude but it is worth noting that the GOP class of ’94 forced responsibility in a brutal faceoff that literally shut down the Federal government for weeks. In a beautiful outcome for the left, Clinton got credit for look brilliant for the rest of his term as the economy improved.

Yes, Bush has blame for economic problems, but he is not running for any office anywhere. The present desire of Americans is for fiscal discipline and the party in power just passed an huge new entitlement because they are absolutely, completely insane.

And I voted for Obama because I an optimist. Hope springs eternal!

Posted by DanHess | Report as abusive

Hey Justin,

There’s a slight problem with your generally astute analysis. The spending number you have for 2010 comes after an accounting adjustment for TARP. Since the cost of TARP was overstated by some $200 billion in fiscal 2009, an accounting shift cut more than $200 billion from fiscal 2010 spending totals.

CBO spells the accounting shift out in its August mid-session review.

So it looks like spending is roughly $400 billion higher than your hypothetical, making the spending/revenue divergence somewhat more balanced.

Break a leg on NBR.


Posted by JedGraham | Report as abusive

Read: ‘The Three Trillion Dollar War’ ‘The True Cost of the Iraq Conflict’ by Joseph E. Stiglitz. Since that is about the same as the ALL FEDERAL EXPENDITURES IN 2009, AND THE IRAQ WAR WAS NOT FUNDED (= FIRST TIME IN AMERICAN HISTORY THAT TAXES WERE CUT INSTEAD OF BEING RAISED TO PAY FOR THE WARS) , just maybe that had a little to do with the fed deficit. Especially when combined with the deregulation of financial institutions, and the legislators refusal to regulate new financial instruments = $50 TRILLION IN UNREGULATED DEBT. The whole show can collapse again: WAKE UP BEFORE ELECTION DAY.

Posted by ewrzjc | Report as abusive