published Saturday, August 20th, 2011

Recession is culprit in high U.S. debt

By TOM RAUM

Associated Press

WASHINGTON — It’s the loud and clear consensus of Republicans in Congress and on the presidential campaign trail: Runaway government spending is the problem, not taxes.

But the math isn’t so simple.

The number at the heart of the battle cry of the Republicans and their tea party allies — that federal spending has risen to an alarming 25 percent of the economy — is skewed by recession dynamics.

In recessions, federal spending always goes up and tax revenues go down. And the economy contracts in recessions, shrinking the gross domestic product, which is the total output of goods and services and the broadest measure of the economy’s health.

Republicans are calling for sweeping spending cuts and want to hold the line on taxes, even as the U.S. struggles through one of its slowest recoveries since the Great Depression. The jobless rate has been stuck for months at more than 9 percent. With the economy slowing again, the odds of a new recession seem to be increasing.

While spending’s share of the GDP might be at a post-World War II high, tax revenues have fallen to 14.4 percent of the index, the lowest since 1950.

This disparity between what comes in and what goes out plays into the Republican argument about runaway spending.

But it also reflects the mathematical reality that during recessions, tax revenues go down sharply because people and companies make less money and so pay less in taxes. Federal spending goes up, even before stimulus programs, with an increasing demand for government help from food stamps and unemployment compensation and other safety-net programs.

At the same time, the negative economic growth associated with recessions lowers the GDP number on the bottom of the equation, further boosting the ratio of spending to GDP.

Since 1970, federal spending has averaged just over 21 percent of GDP while tax revenues have averaged over 19 percent.

The last time since World War II that federal spending exceeded 23 percent of GDP was in 1982 and 1983, when it rose to 23.1 percent and 23.5 percent, respectively, during what was then called the worst recession since the Great Depression. A Republican, Ronald Reagan, was president, and he was hardly anyone’s idea of a tax-and-spend liberal.

Federal spending is even higher now as a percentage of GDP, but not by much — just between 1 and 2 percentage points. That reflects the fact that the most recent recession was far deeper than the 1981-82 downturn, which lasted 16 months.

Much of the present large gap between tax revenues and federal spending comes not from political decisions but from what happens to a nation’s finances during any deep recession, economists suggest.

But you wouldn’t know it from some of the recent campaign rhetoric. The Republican candidates all want to shrink government’s role by slashing spending and taxes, and repealing or suspending regulations.

—Former Massachusetts Gov. Mitt Romney asserted that, because of the rise of the ratio of government spending to GDP on President Barack Obama’s watch, “We’re inches away from no longer having a free economy.”

—Former Pennsylvania Sen. Rick Santorum: “We’re now at almost 25 percent (of GDP) ... the problem is spending, not taxes.”

—Reps. Ron Paul of Texas and Michele Bachmann of Minnesota insisted they would never vote to raise the U.S. debt limit and they decried the rise in federal spending. The recent bipartisan debt deal, which includes a big spending-cut component, won the support of many tea party-aligned lawmakers, however.

—Texas Gov. Rick Perry said that Federal Reserve Chairman Ben Bernanke would commit a “treasonous” act if he “prints more money” before next November’s elections. “We would treat him pretty ugly down in Texas,” Perry told an Iowa audience. Economists generally credit Bernanke with helping save the nation’s financial system by stimulating it with a flood of new money.

Economist Bruce Bartlett, who worked in the administrations of both Reagan and President George H.W. Bush, said some of the statements by Republicans make him cringe. “And what sometimes makes me cringe more is the silence from their competitors.”

Bartlett includes the solid opposition to any tax increases from the entire GOP field, citing the recent debate when not a single Republican participant would agree to accept even a mix of $1 in new taxes for every $10 in spending cuts.

“It’s the cowardice of people who know they’re wrong when they say these things that disturbs me more than the fact that some people say crazy things,” Bartlett said. He said the Republicans were clearly playing to the party’s conservative base for the primary elections “but when you repeat these things, they tend to get solidified.”

He added, “The same is true in both parties. It’s just that there’s no primary race on the Democratic side.”

The intense focus by Republicans and some conservative Democrats on cutting spending to reduce the national debt, now at nearly $14.5 trillion, helped put deficit reduction high on the priority list for both parties.

But polls continue to show that people are more concerned about the lack of jobs than they are the deficit. Nearly 15 million are jobless in the U.S.

Obama, now on vacation, plans a major speech on the economy after Congress returns in September, trying to emphasize jobs and help the poor and middle class, aides said. The plan is expected to contain a mix of tax cuts, construction projects and steps to help the long-term unemployed.

Even though the pace of recovery is painfully slow, any improvements in the jobs situation will help spur stronger economic growth, leading to more tax revenues and lower federal spending.

“If the economy starts to get better, then everything gets better,” said Democratic strategist Mark Mellman.

But it will be a slog.

As the recession that began in December 2007 intensified, federal spending increased from 20.7 percent of GDP in 2008 to 25.0 percent in 2009, according to figures compiled by the White House budget office. And while the recession was officially declared over in early summer 2009, overall federal spending was 23.8 percent of GDP last year and is projected to come in at 25.3 percent for 2011 amid fears of a new, or “double dip,” recession.

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rolando said...

The economy was strengthening -- companies were again hiring -- when FDR lowered the boom and started screwing with things. It took a hostile Supreme Court's "unconstitutional" decision that ended the National Recovery Act and a major war to finally end the malaise.

Much the same will happen with the demise of ObamaCare and booting The Hussein out of office.

August 20, 2011 at 2:10 p.m.
s36spec said...

My reading of the Depression period was that things were indeed turning around in the mid 30ies so FDR attempted to balance the budget. This (in hindsight) being too soon, the economy took another dive. The massive stimulus and jobs program also known as WWII brought America back to prosperity but at a terrible cost in blood.

August 20, 2011 at 5:14 p.m.
harrystatel said...

Government is the bloody culprit as always; recession, warfare, welfare, and loss of liberties are the results.

August 21, 2011 at noon
rolando said...

Amen, harry.


s36 -- Congress had their fingers in screwing with the economy in the 30s as well. Everything the government did -- except for the Supremes -- made things worse. WW2 wasn't a stimulus/jobs program, it was literally a fight for survival.

August 21, 2011 at 12:29 p.m.
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