Challenges for the Treasury

Several appointees have an article in the WSJ today. They begin the third paragraph with this point:

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed.

If we’re counting from 2007, then revenues are greatly changed as this chart shows:

As Wikipedia explains:

Between 2001 and 2011, spending increased by 5.9% GDP (from 18.2% GDP in 2001 to 24.1% GDP in 2011), while revenues declined by 4.1% GDP (from 19.5% GDP in 2001 to 15.4% GDP in 2011), resulting in a 8.7% GDP deficit for 2011. Medicare/Medicaid spending increased by 2.0% GDP and defense spending increased by 1.7% GDP from 2001 to 2011. Individual income tax revenues fell by 2.4% GDP and payroll taxes fell by 1.3% GDP from 2001 to 2011.

Revenues haven’t just not increased, they’ve collapsed. This drop has happened even as the automatic stabilizers – programs like unemployment insurance and food stamps – have increased spending. This is what’s supposed to happen in a recession, but it highlights the bizarre focus that many have on cutting the deficit through “austerity.” If the cause of the deficit isn’t more laws enacted and programs started but a business-cycle-caused drop in tax revenue, then the most effective way to reduce is to help the economy improve and get people back to work, earning money, and paying taxes.

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