“Everybody” knows that government spending is out of control, and that is the reason that the budget deficit is soaring out of control. “Everybody” should not be taken seriously.
Yesterday, the Budget Deficit for October — the first month of the 2011 fiscal year — was released. It showed a deficit of $140.43 billion, down $35.93 billion or 20.73% from October of last year. That comes on top of a deficit that fell for all of fiscal year 2010 by $121.6 billion from fiscal year 2009 (see Budget Deficit Falling, Not Rising).
The budget numbers are extremely seasonal, and are not seasonally adjusted, so looking at month to month changes is not really relevant. It is the year-over-year numbers that you have to look at.
So how did we manage to see the deficit fall? Through a combination of increased revenues and lower spending.
The Big News That No One Has Heard
Government revenues rose by $10.66 billion to $145.95 billion (7.88%) and spending fell by $25.27 billion to $286.38 billion (8.11%).
So far, the media silence on this news has been deafening. I could not find a single mention of it in today’s New York Times, nor on any of the cable news I watched last night. I don’t think CNBC has even mentioned it. Why? Because it does not conform to their pre-existing narrative, i.e. what “everybody” knows.
Suppose for a minute that the budget deficit had increased by $35.93 billion or 20.73%. Where do you think that would go in the newspaper? My guess is page A-1, above the fold.
The increase in revenues is simply due to the fact that the economy is in better shape now than it was a year ago. Of course it is not in as good shape as we would like to see it, but there are almost 1.1 million more people working in the private sector now than there were a year ago. Relative to the over 8 million jobs lost during the recession, we still have a long way to go, but it sure makes a bit difference to those 1.1 million who now have jobs.
How the Numbers Break Down
Individual income tax receipts were $71.40 billion, up from $61.25 billion a year ago. Corporate tax receipts were actually negative for both periods and essentially unchanged. So much for the claim that our corporations are being taxed too much.
Total on-budget revenues were $99.70 billion, up from $88.57 billion a year ago. Off-budget revenues (mostly Social Security taxes) were virtually unchanged at $46.25 billion, down from $46.64 billion a year ago. On-budget outlays, which is just about everything the Federal Government does except for Social Security, tumbled from $169.98 billion a year ago, to just $132.55 billion.
The departments that saw spending decline the most were Health and Human Services, with a decline of $14.35 billion, or 16.7%, followed by the Department of Veterans Affairs, with a decline of 2.92 billion or 22.5%. The Pentagon spent $2.35 billion less than a year ago, but that is a decline of just 3.5%. The Department of Labor spent $1.42 billion less, a decline of 12.1%.
Granted, the news was a bit overshadowed by the release of the draft proposal from the Deficit Reduction Commission chaired by Erskine Bowles and Alan Simpson (see Deficit Reduction: A Daft Draft), but that proposal is not likely to even get the votes it needs from the other members of the commission, let alone be enacted in to law.
Still a Long Way to Go
Even if the rate of reduction in the deficit can be sustained for the full year, that would still leave us with a deficit of $1.025 Trillion for the full year. That level is not sustainable over the long term.
However, right now, we need to be running deficits. The consumer is not consuming the way he used to. The reason is that his balance sheet has been battered by the popping of the housing bubble. That wealth that was destroyed was often part of the plan for either retirement or the kids education. Now if people are going to have any hope of being able to retire or send their kids to college, they have to save more out of current income (keep in mind that paying down debt is effectively the same thing as saving).
Businesses have no reason to invest to expand production if they don’t think the customers will be there, regardless of how low the cost of capital is. The only parts of the economy that are left then are government spending and net exports.
We got a little bit of good news on the net export side yesterday, but it was just a little bit of good news, and certainly not enough to offset the lack of oomph from either the consumer or investment.
Another major area of investment that has been lacking has been residential investment, aka home building. Traditionally, that has always been the part of the economy that has pulled us out of recessions. But with the massive overhang of existing homes on the market, including the shadow inventory of homes that are likely to be foreclosed on in the near future, there really is not a big need to build a lot of homes right now.
That means the government has to step up and spend. It’s really simple arithmetic folks. If GDP = C + I + G + (X-M), than the change in GDP (aka GDP growth) has to be equal to the change in C plus the change in I, and so on. If C is falling and because of that I also falls, if we are going to have any hope of growing GDP then G has to go up, or (X-M) has to improve.
Thus, the declining budget deficit is actually bad news for the economy right now, but a good thing in the long run. We need more fiscal stimulus not less with unemployment still running at 9.6%. Monetary stimulus in the form of the Fed’s $600 billion T-note buying program will help, but it is not going to be nearly as helpful in getting the economy going again as additional fiscal stimulus would be.
Even so, you would think that someone, somewhere would notice that a problem that supposedly was at the core of the big GOP victory last week has just gotten substantially better. No, if it does not fit with the pre-existing narrative, it is not worth printing. Even in the supposedly “liberal” mainstream media.
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