Looking at Data, US Style

The US is heading towards some kind of agreement on its rather odd thing called a debt ceiling - it would seem some level of debt above which the Federal Government cannot go.

Seems like a good time to have a little look at the data to try and disentangle the politics from the economics. I've come across a couple of major arguments thrown around by people concerned in one way or another about the US level of Federal Debt. One is that it's all the fault of the Republicans due to the Bush tax cuts - the only surpluses since 1960 essentially came under Clinton (1998-2001), before Bush cut the taxes. The other argument is nested there - that there's been precious few surpluses post-war any old how - the US is clearly on some unsustainable pathway...

Bush passed two tax cutting laws during his presidency, in 2001 and 2003, which are marked on as black lines in the upper plot below, which is the Federal deficit, and also Federal receipts and spending, since 1790:

It would seem fairly clear that once the first act is passed, the fledgling Federal surplus vanishes. Of course, that could be coincidence, and wasn't helped by the small recession the US suffered around the time, after the dot.com bust.

However, it's hard to escape the fact that a trajectory towards budget surpluses was reversed, since even in the good times of the mid- to late-2000s, when the US economy was booming, there was no return to budget surpluses. Clearly if you reduce the amount that people pay in taxes, then receipts will fall - rocket science this is not.

Now, has the US been on an unstable debt bender since the 1960s? To help out here, the bottom panel of the above graph looks at US debt, as a percentage of GDP. Post WW2 right up to about 1980, the debt-to-GDP ratio is falling - so after 1960 - and in fact after 1950, when deficits become the norm much more than surpluses, still the US debt-to-GDP ratio falls and falls.

This highlights something that those on the right seeking to paint the current situation as unsustainable fail to notice: If growth is high, then deficits are not unsustainable, necessarily. It involves a much more in depth look at the situation than can be afforded in a blog post, but the point is: The current situation needn't be unsustainable for the US. Clearly, 10% deficits are unsustainable, but nobody, not even rabid lefties (inasmuch as they exist in the US), are suggesting that 10% deficits remain forever. When 6% of the output of an entire country is lost, it is inevitable that tax receipts will fall, and expenditure on unemployment benefits will rise.

 

The bottom line is this: Given the level of deficits post-Bush tax cuts, something likely does need to change. The right would say "current spending levels are unsustainable", but what they fail to add is the condition, namely "given current tax levels". An equally valid position is "current tax levels are unsustainable given current spending levels". Given the thirst for the public sector in the US, tax levels need to be higher than they were reduced to under Bush. And of course, here is where politics enter in; the Bush tax cuts are said by many on the left to have been a political manoeuvre to get lower spending in the future - and it's now, in these debates over the debt ceiling, where they hope to get their way. But the point is: Current spending levels aren't necessarily the thing that is unsustainable; equally, it's current tax levels that are unsustainable. Something I don't think right wingers are quite so happy to accept...