Comments on economics, mystery fiction, drama, and art.

Friday, July 29, 2011

The Debt Ceiling Crisis

Houston, we have a problem.

The problem is that the Republican Party in Congress refuses to agree to any reasonable solution to raising the debt ceiling.

The problem is that Congress--including the Republican members of both houses--has authorized spending that exceeds the tax revenue that will be collected.

The problem is not the spending side of the equation. 

Between 1947 and 2007, federal government expenditures (at all levels, including transfer payments and interest payments) averaged about 21% of GDP, while government recepts averaged about 19%.  Since 2007, federal government spending has, in fact, increased to about 25% (from about 20%).  But that increase has been entirely a consequence of the recession, as real federal spending has increased by only about 6% while real GDP has remained almost unchanged.  Had real GDP grown at its long-term rate of about 3% per year, federal government spending as a percent of GDP would have declined since 2007, not even taking into account the share of spending that is in response to the recession.

Meanwhile federal government receipts as a percent of GDP have declined from about 19% to about 16%; again, this is almost entirely a result of the recession.  Federal government tax revenues are nearly 12% below their 2007 levels.  Absent the recession, the current budget deficit would be less than half its current level.  And we would not be having this debate.  Indeed, absent the recession and the tax cuts enacted in 2002-2004, we would have a budget surplus of about 2% of GDP.

We have higher than normal (and higher than expected) spending, because of the recession,  We have lower-than-normal revenues, because of the recession and because of the tax cuts enacted in 2002-2004, revenues that are lower than they would be without the recession.

None of the current problem is a long-term issue. 

But the country's finances are being held hostage. 

The responsibility is not shared.  The responsibility is wholly that of the Republican members of Congress, who, offered a deal to reduce federal spending significantly below its long-term level, without additional tax revenue, said "No."

Even if, by doing so, the nation's credit and economic well-being suffer. 


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