4/6/12 - the mind-numbing size of our current deficit

In today's excerpt -- the unprecedented, mind-numbing size of the current budget deficit. In 2000, federal spending was 18% of Gross Domestic Product (GDP, which is the primary measure of the size of the economy). In 2011, it was 24% of GDP, or about $900 billion dollars more in annual spending than in 2000 -- an increase that came primarily from military spending and healthcare programs. Regardless of an individual's preferred solution to this fiscal crisis -- conservative, liberal, or somewhere in between -- the scope of the issue is daunting and worth reflection if only for its sheer size. Here the size of the deficit is framed by noted conservative economist John Taylor:

"Spending has grown to be much larger than revenues in recent years. In 2011 federal spending was $3.6 trillion and revenues were $2.3 trillion. As a result, the deficit -- the difference between spending and revenues -- was $1.3 trillion, or 9 percent of GDP, about the same percentage as in 2010. The federal government is so deep in the debt hole that it has to borrow more than one-third of what it spends. And it is expected to stay in the hole; the budget will remain in deficit and then the deficit will actually increase in later years if policy is not changed. ...

"So how do we get from gigantic deficits to a bal­anced budget? Let's start with how much the federal government is actually spending now, which is about 24 percent when measured as a ratio to GDP. Next let's consider how much the government was spending before the debt started its explosive climb around 2007. In that year spending was 19.5 percent of GDP. A commonsense and quite reason­able budget plan would be to insist simply that federal spending be brought down from 24 percent to 19.5 per­cent of GDP and then held there.

"It is important to recognize that a plan such as this, which reduces spending as a percentage of GDP, does not necessarily mean that the number of dollars actu­ally spent by the government declines. In fact, under this plan government spending would increase in tandem with GDP. Government spending would grow from $3.5 trillion in 2011 to $3.9 trillion in 2016 to $4.7 trillion in 2021 under the assumption that GDP grows according to the CBO's forecast.

"Some people may want to argue that the percentage should be lower, say, 18 percent of GDP, which was what the government spent in the year 2000. If so, they can think of this proposal as a compromise position. The 19.5 percent number does not violate the principles of economic freedom, and as we will see, it brings with it another advantage. In any case the 19.5 percent strategy should be doable. It is simply limiting government to the size it was before the financial crisis and the recession. It is not what one would call austerity, a term used to describe drastic and sudden declines in spending that would elimi­nate most essential functions of government that Ameri­cans have been accustomed to for generations."


John B. Taylor


First Principles: Five Keys to Restoring America's Prosperity


W.W. Norton & Company


Copyright 2012 by John B. Taylor


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