What do deficits mean? Part 4, spending.

So we all know that the deficit has grown since the financial crisis hit. And it’s grown quite a bit. Here’s a great visual of exactly how.

deficit vs taxes by gdp

Note that the difference between the red and blue lines is the current deficit.

The most notable thing is probably the sharp jump in spending, right? Well, kind of. This graph is a popular picture of what’s happened since the recession started, and it shows both revenue and taxes as a percent of GDP. This is a common way of looking at those because straight dollars without the context of the rest of the economy can be misleading. But in this case, we need to remember that there was a massive drop in GDP. That means that if spending hadn’t changed at all we’d still see an upward slope for spending on that graph, because a fraction gets bigger when you shrink the denominator. So for comparison, lets look at federal spending in inflation adjusted dollars, and take GDP out of the equation.

deficit vs taxes

Okay, so we do have a spending increase, but it turns out that when you take out GDP the spending increase is very closely following the trend of the last decade. And again, it’s the drop in tax revenue, not the increase in spending, that’s driving the massive jump in the deficit. Even so, lets look at where that additional spending comes from.

This is a comparison of the change in spending in three categories from 2000-2007 and from 2007-2010.
safety net spending

So when unemployment shot up so too did income security programs like unemployment insurance and food stamps. Medicaid costs also jumped sharply. But everything else? Government spending not directly related to the rate of unemployment or poverty has actually slowed, although only slightly. Spending hasn’t declined since Obama took office, but despite the claims of some, it hasn’t surged either. Even the much reviled stimulus did little to grow government spending, as only about 10% of it could fairly be considered new spending. The majority of it went to tax cuts, replacing state level cuts, and maintaining the social safety net in the face of a mass surge in people who needed it.

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2 responses to “What do deficits mean? Part 4, spending.

  1. Too bad Obama hasn’t let the rest of the country in on that secret. The Democrats suck at getting the facts out.

  2. Another great piece, Geoff. Well done.

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