Chez Gene: What is “Deficit Spending”? -- TWODS Part 2

This post will make a lot more sense if you read at least some of the introductory comments in Part 1 here.

Let’s begin by getting our terminology as close to every day language as we can.

The Federal Deficit

The federal government budget deficit/surplus is annual difference between the amount of money the federal government receives (receipts) from taxes and other sources, and the amount of money the federal government disburses (outlays).

The Treasury borrows the difference between receipts and outlays if the former is smaller than the latter. From where? From something called the “credit market”.

There is no accepted definition for the term "Deficit Spending" any more than there is a commonly accepted definition for "terrorism". "Deficit Spending" appears to mean "the federal government is spending more than it collects in taxes -- not good. More deficit spending -- more bad".

"Deficit Spending" is Newspeak with no clear metric. Thus to try to measure it one has to use one of two definitions:

Either:

1. The size of deficit spending is measured by the size of the published federal government budget deficit in any particular year

2. The size of deficit spending is the amount of money the federal government borrows from the credit market to fund the deficit in any particular year.

Definition 1. In all federal government budget documents definition 1 is used for the “budget deficit”. However, it is not routinely reported, is difficult to analyze, is somewhat easier for politicians to manipulate, is not part of a "closed" or "balanced" accounting system and reports by "Fiscal Year (October 1 - September 30)". Typically, I will use the "budget deficit" history and forecasts published by the Congressional Budget Office (CBO) and the Administration only when I discuss the budget.

Definition 2, the amount of government borrowing, is routinely reported in many documents. It is clearly defined, balanced every quarter in the Federal Reserve "Flow of Funds" report, uses a Calendar Year (CY), and is much more difficult to "game". I plan to use the Fed Flow of Funds borrowing and debt report as the main data document when I compare "deficits" between private and public sectors and in most of my "debt and borrowing and GDP" posts.

The close relationship (except in the year 2008) between the federal budget defined "deficit" and Treasury "borrowings to fund the deficit" is obvious in Chart 1 below.

Funding the banks in the financial crisis chaos of CY Q4 2008 (FY Q1 2009) accounts for most of the huge difference in "2008" between "federal government borrowing" and the "federal government deficit".

Chart 1: Borrowing from Fed Flow of Funds Table F209, Deficit from FY 2011 Budget

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(Note: In principle, under the appropriate circumstances and regulations, the money the federal government currently borrows from the public (the credit market) could be printed by the treasury or borrowed from the Fed -- which is a convoluted way of printing money. I will have much to say on this “printing money” subject in later postings.)

The Federal Debt

Federal debt is simply the accumulation of annual federal deficits.

Public and Private Borrowing and Debt

Federal government financial activities are also known as “public” activities. All other national financial activities are known as “private” activities.

“Public” implies that the citizens of America, collectively, are responsible for all the actions including the debts of their government. “Private” implies that the householders, businesses and banks of America are individually responsible for their actions and their debts.

Thus “deficit spending” is really “public” or “federal government” borrowing every year. “Federal debt” or “public debt” is the accumulation of federal (public) borrowings since the founding of the American Republic. The term "Sovereign Debt" has been much in use in recent months. It too has no "hard meaning". Loosely, Sovereign Debt is equivalent to federal government debt (US) or central government debt (most countries). I have discussed US sovereign debt in some detail here.

Measuring Government Deficits

Now that we’ve got the definitional stuff out of the way, let’s look at the history and size of federal deficits. While we are at it, let’s associate “deficit spending” with Republican and Democratic administrations. In the Presidential analysis below I have gone back to President Carter (1977-1981).

Charts 2 and 3 tell us the history of federal government budget deficits between 1941 and 2009 measured in constant $2005 and as a % of GDP.

Chart 2. Federal Deficit or “Deficit Spending” History by Administration. Data from US Budget 2011

Chart 3. Federal Deficit or “Deficit Spending” Data from US Budget 2011

The charts tell us:

The deficit was more that a quarter of GDP during WWII. A combination of disarming and rapid economic growth and high taxes drove the budget into surplus territory.
Between the end of WWII and 1949 the deficit became a surplus and hovered around zero until about the early 1960s.
The combination of Vietnam spending and increased social welfare programs without accompanying tax increases drove spending negative in the late 60s.
In 1971 the combination of several factors primarily tied to expenditures for the Vietnam war, caused President Nixon to unilaterally abandon the Bretton Woods agreement to convert the dollar to gold at a fixed price.
The recessions and oil shocks of the 70s continued to increase the deficit throughout the 70s.

President Carter (D,1977-1981) inherited a deficit of more than $200billion from President Ford (Nixon resigned in 1974) and managed to reduce it to less than $200billion before he was voted out of office after his first term
Presidents Reagan and Bush I (R, 1981-1993) with their “military rearmament, tax reduction and foreign war” voodoo economic policy, more than doubled the deficit to $400billion, and drove the deficit to -5% of GDP. “Trickle Down”, “Efficient Market”, “Small Government”, “Less Government Regulation” mythology began under Reagan and reached its current peak under Bush II.
President Clinton (D, 1993-2001) drove the $400billion deficit to a surplus of more than $200billion by a combination of tax increases aided by a "tech bubble".
President Bush II (R, 2001-2009) again instituted a Reagan strategy of military rearmament, massive tax cuts and two wars. Measured by “deficit spending” his tenure was a catastrophe. He managed to saddle the country with a financial crisis, and an annual deficit of more than $1,200billion before he retired to his ranch.
It is Republican Administrations, not woolly thinking liberals, which have dramatically increased deficit spending.

Although it is not shown in the charts, it is a fact that, at the end of the Bush Administration TBTF banks were saved from bankruptcy as trillions of dollars of private bank debt was quietly moved by the Federal Reserve from private banks to the public purse, thus increasing the public debt. These moves were done almost secretly with no details of the transactions provided to the public.

Trillions of dollars more of private bank debts were guaranteed by the government and the Fed. There was a remarkable absence of squealing from banks and corporations about “increasing deficit spending” and increasing government debt”, as the government saved their skins.

The current Republican-Corporate-Banksters pushing “The War on Deficit Spending” mantra are clearly hypocritical liars. The same crowd under Reagan and Bush II massively increased deficit spending by reducing taxes on the wealthy, and by increasing military budgets, waging foreign wars and failing to regulate and prosecute Wall Street’s criminal behavior.

The carefully researched NYT Leonhardt report linked to and extracted from below, shows that the deficit for the years 2009-2012, (the Obama years) were projected by the CBO in 2001 (the first year of Bush II) as a surplus of $800billion annually.

CBO now (2009) projects a deficit of $1200billion annually for the same time period, a swing of $2trillion from the end of the Clinton era to the end of the Bush era.
According to the NYT article this $2trillion increase in forecast deficits during the 2009-2012 period are due:

37% to the recessions effect on tax collections and increased safety net spending

33% to President Bush's tax cut and Medicare increases
20% to President Obama's continuation of or agreement with Bush era policies -- Iraq and Afghanistan wars, tax cuts for those earning less than $250,000, and the bank bailout which President Bush signed, and Obama agreed with.
7% to the Obama February stimulus bill
3% to the Obama health care, energy, education agenda

Reducing deficit spending was not then, and is not now a Republican priority.

Pushing TWODS is a cynical gambit to exploit their fellow citizens fear of the unknown. American citizens have been indoctrinated to believe that uncounted and unknown horrors will descend upon them if deficit spending is “not reined in” and that the country will go bankrupt if the "federal debt" is not decreased.

Since Reagan, the toxic myth that, except for making war and spreading democracy abroad “public borrowing” is evil, and all governments and regulators are incompetent, has become the revealed truth.

Unfortunately, today’s great communicator, President Obama has not succeeded in denting that mythology.

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I will end this post with a link to, and extracts from an excellent article on current and near future deficits, by Dave Leonhardt, a financial reporter for the NYT.

America’s Sea of Red Ink Was Years in the Making

"There are two basic truths about the enormous deficits that the federal government will run in the coming years.

The first is that President Obama’s agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. (I underlined this para.—Gene)

The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested.
..;….
The story of today’s deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years.

You can think of that roughly $2 trillion swing as coming from four broad categories: the business cycle, President George W. Bush’s policies, policies from the Bush years that are scheduled to expire but that Mr. Obama has chosen to extend, and new policies proposed by Mr. Obama.
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The chart below is from the Leonhardt article referenced above