Do we have a spending problem or a revenue problem? You be the judge:
This includes everything: defense, welfare, Social Security, Medicare, interest on the debt, etc. In 2019, spending was exactly the same as it was in 1980. Revenue was down by two percentage points.
After that we had a huge spike in spending due to COVID—and thank goodness for that since it rescued the economy. Most of it, along with some bits from the American Rescue Plan, has gone away but some of it is still hanging around. That's mostly why we had the upward spike in 2024:
The increase is entirely accounted for by leftover COVID spending plus a big increase in interest payments thanks to the Fed. Some of that still needs to be cut back, but an overall spending target of around 22% of GDP is unavoidable thanks to Social Security and Medicare over the long term.
So that's the story. Aside from COVID, spending has stayed level for nearly half a century. It will go up a bit over the next decade thanks to an aging population, but that's it. All we need now is for revenue to catch up.
"All we need now is for revenue to catch up."
That is precisely the reason for the gaslighting called DOGE - headed by two individuals who have the most at stake if revenues are to go up.
Looks to me like the problem is Republicans.
Yup.
Definitely. They yowl about "tax'n'spend Democrats", then spend even more without accompanying taxes to pay for it. Their voters, somehow, never seem to notice or care.
Well, I would love to spend without worrying about income. Wouldn't you?
https://en.m.wikipedia.org/wiki/Baumol_effect
One thing you need to consider is the Baumol Effect. The rate of inflation the government faces is little related to the CPI, and is almost certainly much higher because of the relatively high proportion of government spending related to services.
I don't think that is relevant any more. Real wages are relatively static these days, despite rising productivity from digitalization. In fact, that is what the chart shows, even though most government spending (in the US) is not for service provision but for the military and transfer payments. Talk about missing the point.
The Baumol Effect doesn’t predict a higher rate of increase in compensation for service labor, just that it will increase approximately with goods-production labor. In any case, wages, salaries and purchased services are a smaller component of government spending than transfer payments, interest and purchases of goods. So I also don’t think it has much effect.
But there is no solution because the only way to restore revenue would be to increase taxes on the most helpless segment, the ultra wealthy.
I'm pretty sure that's unconstitutional.
+1 for enjoyable snark.
and exactly why do we need revenue to catch up?
please learn and understand MMT
MMT is not gospel. You will find lots of respected (and Nobel-winning) economists that reject it. The most basic elements are standard economics, i.e. you don't need to balance the budget. But even MMT proponents don't assert that you can just spend as much as you want. Everyone agrees there are limits. The problem is, nobody really knows were they are. The worrisome thing is that big interest bar. It now dwarfs any other expenditure, and is growing rapidly. The fear is that it's not a problem right up until it is.
You could use "printing money" to finance the deficit. The real limit is inflation and trade impacts.
Correct. And a very mild bout of limited inflation kicked the dems to the curb and gave an idiotic doddering blowhard with autocratic aspirations who four years ago nearly pulled off a coup the Whitehouse and a compliant Congress.
So maybe inflation is something we need to worry about, since plainly Our Fellow Americans will burn it all down if they experience it.
This is a great point. Inflation might not be an economic problem as such, but it's definitely a political problem.
If Trump gets his way on full extenson of the 2017 cuts, plus the stupid "no taxes on tips and Social Security benefits" pander, inflation will no longer be a "political problem". It will have become an inevitability, and the Fed will have no way to fight it. Interest payments will have passed the inflection point where raising rates quickens debt accumulation severely enough that the dollar's value starts to plummet.
In all honesty, we may be passing that point now. The quiverings in the bond market ought to be an alarm for both sides of the political spectrum.
The 2017 cuts must be allowed to expire but NOT the SALT cap. It should be raised somewhat to keep from destroying the investment management industry in New York, New Jersey and California, but the Federal government must increase its revenue percentage of GDP by at least that 2% that has been forfeited since the Clinton years. The bleeding has to stop so the patient can begin to heal.
Democrats will have to be willing to cut Medicaid to get the Republicans to agree, but at least most Blue States have the ability to fund the gap in coverage themselves. Red States can punish their poor voters to their hearts' content. Caveat emptor, Po What Foulks.
There's still no reason to think that inflation played a significant role in Dem turnout falling slightly from prior years.
Popular theory, but short on evidence.
The person here who doesn't understand MMT is you. Contrary to what a lot of amateur MMT boosters believe, it does not say that deficits don't matter. In fact, they matter to pretty much the same extent as they do in conventional monetary theory. The difference comes in how to alleviate the adverse consequences of excessive debt.
What MMT says is that government debt isn't financially constrained. It can always print the money to buy whatever it wants. But that doesn't mean that deficits are fully unconstrained. Instead, they are limited by inflation.
What MMT says is that deficits and resulting inflation should be controlled through fiscal policy, and not monetary policy. There are a number of complex reasons why that is, based mostly around an argument that I, and a lot of professional economists, don't really buy, that the effects of monetary policy changes are the opposite of what conventional theory claims. It says that raising interest rates is inflationary, and lowering them is deflationary.
So, if inflation is becoming a problem, the prescribed response is to cut spending or raise taxes. If deflation is the problem, you increase spending or cut taxes. Despite not really agreeing with MMT, I do think that, in many cases, fiscal policy would be a better tool to use in many instances, though it has issues, too. But that would require Congress to act like a bunch of technocrats rather than deeply partisan actors. So the chances of properly employing fiscal policy to deal with this issue is pretty much zero. Interest rate tools are the only ones they have.
yeah. no. it's not me that doesn't understand it.
you might start with the fact that the national debt is not debt in any conventional sense of the word.
it may have unique characteristics that distinguish it from personal or corporate debt, but of course it is debt in the conventional sense
The unique characteristic that public debt has (and you're right that it is debt) is that unlike private debt which is subject to default it can always be paid. That is why the debt itself, as opposed to the effects of deficit or surplus on inflation and unemployment, is irrelevant.
also consider that deficit hawks have been proclaiming an impending
economic catastrophe since the 40's. hasn't happened yet.
gee, maybe that's the wrong way to look at it.
and do you think it's even possible to pay off the nat'l debt?
anyway, the critical part of MMT has nothing to do with what you've written in your post.
There's a reason why the book is called "The Deficit Myth" and not "Hey! Don't worry! We'll just print some money!"
also too, remember when Clinton was on track to pay off the debt and the Fed panicked? The Fed knows.
No, I stand by what I wrote. You have no idea what you're talking about. You've read just enough to think that you know a lot more than you do.
I am certainly not an expert in MMT but I do understand the essential idea. You don't seem to. Your post talks about policies. MMT is not about policies. It merely describes the creation and movement of money.
And the most essential point is that all government spending is funded by the government creating of money. It is absolutely not dependent in any way on tax revenue.
Do you think that the bonds sold to cover the deficit are actually used to fund the government? We could stop selling bonds tomorrow and it would have zero effect on our ability to fund the government.
so, I invite everyone to read this mind-bender
https://moslereconomics.com/wp-content/uploads/2020/11/Seven-Deadly-Innocent-Frauds-of-Warren-Mosler.pdf
"It says that raising interest rates is inflationary, and lowering them is deflationary."
This is the biggest problem I have with MMT. This more or less flies in the face of experience, but it is central to their argument that fiscal policy is a better tool. I can see a case for both, depending on the circumstances at the time. But, as you say, it's folly to expect Congress to do this properly.
It's folly to expect Congress to do almost anything properly. Pegging the currency to gold was an attempt to solve this problem, but it caused other problems so we abandoned it. Some (most?) MMT theorists recommend pegging the currency to the price of basic employment with a job guarantee.
It will go up a bit over the next decade thanks to an aging population, but that's it. All we need now is for revenue to catch up.
Wouldn't it be nice if we could simply import younger folks to keep the population younger and working. I bet that would make it easier to pay our bills. Wait a minute. We can do this! Oh, no, wait a minute again. They might poison our blood.
Let's just keep increasing the population...
This is functionally the equivalent of creationists invoking the 2nd Law of Thermodynamics to argue that evolution can't be true. This ignores that the Law is talking about a closed system, which the Earth is not, with respect to energy and entropy.
Similarly, the problem of overpopulation is global. How many immigrants the US allows in has nothing at all to do with that. It's simply shifting the same amount of population from one country to another. With regards to the number of human beings, the Earth is a closed system. The United States is not.
The Earth is not a "closed system" as regards shifting population among various countries. Every immigrant to the US from Colombia becomes a huge extra source of greenhouse gas emissions because in Colombia that immigrant was usually living the fairly low Carbon life of a poor Colombian. Once in America she or he immediately becomes a participant in our high-Carbon life of sprawling cities and large, temperature-regulated houses.
Yes, we need their labor, but it puts an immediate burden on the ecosystem.
I know there's contention around Jared Diamond and Collapse, but I think he was dead on when it comes to third world populations looking to emulate the lifestyles of the first world and the environmental impact that will cause.
I may be wrong, but the spending line seems to omit spending on the Iraq War, which was systematically kept "off the record" for official accounting of government spending. Or was it really so small you can't even see it?
If I'm not mistaken the Iraq spending is part of the big spike in the Obama years. Bush intentionally kept it off the books, but then Obama out back in.
The big spike in the Obama years is almost entirely the response to the 2008 financial crisis. That drowns all other changes combined.
The effect of the Iraq and Afghan wars is in the much less dramatic rise between 2000 and 2007. The cost of those wars is large enough to have significant consequences, but are small enough that they don't produce a dramatic result on a graph like this. Government finances is one of those things where a marginal change can produce major consequences.
Aside from COVID, spending has stayed level for nearly half a century.
Well, see, right there's yer problem. Because as all Patriotic Americans know, so-called COVID was just a hoax to make Real President Trump's "numbers" look bad, or it was a Chinese plot, or its development was funded by American "gain of function" biological research money, and in any case all that Democrat spending was just more welfare for moochers something Gold Standard real money inflation gas prices froth foam ...
You better get right with Republican Thought before it's too late, just sayin'.
And helped put Trump back into the White House.
I thought a handful of trans girls playing HS sports put him back in the WH?
That and eggs being sooo expensive, and brown and black people existing at all.
https://www.researchgate.net/figure/Then-a-Miracle-Occurs-Copyrighted-artwork-by-Sydney-Harris-Inc-All-materials-used-with_fig2_302632920
Years ago I seem to recall Kevin saying in effect "Borrow! Interest rates are low!" Trouble is those interest rates weren't going to stay low forever, and indeed they did not.
I doubt that he or anyone ever made the argument that interest rates will never increase.
With hindsight, spending because interest rates were low still looks like excellent advice. At this moment, higher interest costs appear to be very easy to 'fix' unlike most of the other items affecting expenses and revenues.
The fact that interest rates increased, interest costs went up....and everything was fine...and now interest costs will decline as soon as the Fed gets around to lowering rates seems like proof that past-Kevin had exactly the right idea.
They might come down a bit, but barring another recession it seems unlikely they will ever get back to near zero: https://www.statista.com/statistics/187616/effective-rate-of-us-federal-funds-monthly/
So? Borrowing at x% to invest at x+2% doesn't go bad simply because it is "unlikely" that x will equal 0.
Except that an ever increasing tranche of the "borrowing at x+2%" goes for paying the interest of all the accumulated debt borrowed at "whatever%" so less and less "investment" gets made.
The US does not have the captive pool of patriotic "dumb money" investors that allows Japan to survive with a debt over 200% of GNP. Our "money men" (and women) are better-educated in the market and much less in thrall to the expectation that they will accept a negative rate-of-return long-term.
All of this is wrong.
Interest payments arent reducing overall investment in the US economy.
This is the same terrible argument that is always made. These predictions have looked foolishness for several decades now.
Debt and interest are crushing the economy, as long as we ignore the actual economy. The market will punish the US in the future....any day now, almost at the tipping point....it's coming, be scared!
People never learn.
Most of the financial analysis that I've seen suggests that we should get used to 6-7% rates, that's the normal. Lower rates are an emergency lever to get us out of a financial crisis (like Covid or other meltdown), they aren't there to support sellers who want maximum profit or people who bought overpriced assets.
Paying interest on government liabilities is a legacy of gold standard money that is entirely discretionary under a fiat money regime.
Under a gold standard, the prime directive is don't run out of gold. You must limit the amount of convertible currency you issue, and/or pay people to forego conversion by selling bonds. Neither of those restrictions apply to non-convertible fiat money.
Paying people to park their money at the Fed or the Treasury is just giving people money because they already have money. If they want a return on their money let them do something useful with it.
"Paying people to park their money at the Fed or the Treasury is just giving people money because they already have money. If they want a return on their money let them do something useful with it."
But that's actually why the Fed's prime rate works. It's indirect and may seem convoluted, but setting a baseline rate of return to encourage or discourage people to invest cash (as you describe) is exactly what the Fed's prime rate does.
I understand the theory, but it's not clear that monetary policy is effective in practice.
These are just wild guesses. History shows that these professional financial forecasters don't have a lot of skill in seeing the future.
But they are paid to guess, so they guess.
If unemployment is high, spending via borrowing when interest rates are low will help the economy and get some needed things done. When the economy improves, then pay off the debt. With the government running counter-cyclical, that helps stabilize the economy--and that takes some of the pressure off the Fed.
Instead, we get tax cuts when the economy is hot, and spending cuts during lean times--feeding into a boom and bust cycle.
For what it's worth, Dr Paul Krugman (Nobel Laureate) was saying the same thing: with interest rates at rock bottom, then was the time for the federal gove.rnment to borrow to repair its aging and failing infrastructure, and all the rest.
Those long term loans (T bills) would keep the same low rate until they matured, regardless of what the prevailing interest rates did thereafter. Like the lucky folks with mortgages under 3%. But we didn't. Something something "Republicans."
It looks to me from the chart the real damage was done by the Bush tax cuts.
Exactly. BOTH laws need to be rolled back. That would be pretty damaging to the lowest two quintiles, so some sort of increase in the old personal exemption should be adopted to protect them somewhat. But the party for the rest of us has to stop. We need to pay up or lose the country to economic chaos, which may be inevitable already.
Yep.
https://www.crfb.org/papers/riches-rags-causes-fiscal-deterioration-2001
Not exactly a liberal source, that one (nor is it conservative - it is centrist). I would expect them to downplay the impact of tax cuts, if anything.
"Do we have a spending problem or a revenue problem?"
The answer is No, Neither.
I know we're all supposed to be horrified that America is "living beyond its means" but I'm sorry, this is all perfectly sustainable. I could even make a case that the deficit should be higher, given the wealth and power that the United States has.
The means of America are availability of real resources : labor, materials, infrastructure, and technical know how. Those real resources are limited and we must use them wisely if we are to maximize our economic well-being. Finance is not a constraint.
This is correct.
While that might be true fiscally-speaking, it's not true in domestic politics.
But democrats lose elections often enough that republicans cut taxes every time they get power. Democrats never have ability or the will to raise taxes. So this time around, I’m ready to see them cut benefits to the poor and elderly. Do they have the courage to try?
Remember this panic? No one even noticed and it didn’t make a dent in the debt.
https://www.gao.gov/blog/2016/04/26/understanding-sequestration#:~:text=The%202013%20budget%20cuts%20known,by%20at%20least%20%241.2%20trillion.
"Democrats never have ability or the will to raise taxes."
Wrong. Bill Clinton, a democrat, raised taxes.
The Clinton tax raises did not have a large effect. The Clinton surpluses probably came about because of lack of growth of military spending after the end of the cold war and revenue increase because of capital gains in the stock-market bubble
We may be starting a new cold war so will not get any decrease in military spending. But shouldn't we be getting more revenue from the current stock-market bubble? Is the government going to get a cut in the coming increased wealth from the crypto bubble?
"The Clinton tax raises did not have a large effect."
That doesn't change the fact that Clinton, a Democrat, raised taxes.
Yeah… 30 years ago.
There's a lot of daylight between 30 years ago and "never," troll.
Smarter trolls, please.
Interest paid on the national debt does not disappear into a black hole, it goes back into the economy - or somebody's economy.
An increasing amount of the debt is held in other countries. This could cause problems in the future, depending on many factors, although the US is not going to turn into Greece anytime soon.
Who in the US gets the interest from the debt, and what is done with it? To know what harm or good the debt does you have to know that. How does it affect the distribution of wealth and income?
I'd love to see KD, or someone in the center-left econ blogging world (Krugman? Iglesias? Dean Smith?), address the issue of adjusting for inflation vs adjusting for GDP. Sometimes Kevin adjusts for inflation; here, he adjusts for GDP. My local paper, in criticizing growth in our state's spending under a Dem governor and legislature, adjusts for inflation and argues that per-capita spending has increased by something like 40% over the past 20 years. Relative to state GDP, our state's spending has DECREASED. What are the full argument for adjusting for GDP vs inflation?