The Federal Budget - Part II — Parks, Presidents and Parks

Background

In Part 1 of this series, we displayed Federal Budget receipts, outlays, annual deficits, and cumulative debt from the end of World War II through 1980. During that time, Federal spending increased, but so did the country’s national income (GDP – Gross Domestic Product). As a result, the total debt declined relative to the GDP:

Cumulative Debt as a Percent of GDP - Through 1980

Now let’s look at the trend since then. Spoiler alert - it changed. For the worse.

Government receipts, outlays, and deficits from 1980 to 2020

This chart shows government receipts and spending in constant dollars (adjusted for inflation) since 1980. Even excluding 2020, with its extraordinary COVID-related spending, expenditures more than doubled from 1980 through 2019. The deficit increased greatly in 2009, after the recession, then recovered somewhat until COVID hit. (For example, in 2019, government outlays exceeded 4 trillion dollars; in the annual deficit chart, the straight red line represents a balanced budget, values above that are a surplus, values below that a deficit. In 2009, for example, the annual deficit was about 1.5 trillion dollars!)

Federal Receipts and Outlays as a Percentage of Gross Domestic Product (GDP)

I think the most relevant measure of expenditures and the deficit is to compare the budget to the United States annual income, the Gross Domestic Product (GDP). The larger the economy, the more debt the country can handle, just like a higher-income family can safely accrue a higher debt level than a lower-income household.

From 1980 through 2000, expenditures (orange line) slowly declined from 22% of GDP to 18% of GDP. Prior to 2020, and the COVID spending, outlays grew back to 22% of GDP. The annual deficit, as a percent of GDP, has been growing since 2000. It peaked in the recession year of 2009, then recovered slowly until COVID.

(in the deficit chart below, the straight red line represents a balanced budget. Above the line is a surplus, below the line is a deficit. For example, the 2009 budget deficit was about 10% of GDP)

Cumulative Debt as a Percentage of GDP

The final chart, the most important one, shows the total indebtedness as a percentage of the total national income (GDP)

Total cumulative debt has increased as a percent of GDP since 1980. This means that the debt was growing faster than the country. From about 30% of GDP in 1980, the debt grew to over 100% of GDP in 2012, and has continued to grow since.

Economist Herbert Stein, back in the 1980’s, propounded something called ‘Stein’s Law,’ stated as “If something cannot go on forever, it will stop." He was concerned about the growing debt when it exceeded 50% of GDP. He thought that debt increases cannot go on forever. I wonder what he would think of today’s debt levels that now exceed 100% of GDP

Full Post War Trend

A review of the cumulative debt versus GDP in the post war period shows that the country grew faster than its debt until the early 1980’s. Since that time the growth of the debt has outpaced the growth of the country. We are now back to levels not seen in World War II. Is this troublesome? Can it go on forever? These numbers excluded any of the proposed multi-trillion dollar ‘Build Back Better’ proposals under discussion by Congress.