Thursday, December 3, 2009

Recent and Projected Federal Outlays and Their Role in Deficits

The first graph in my prior post shows that total outlays rose from about 18 and a half percent of GDP in 2000 to about 21 percent of GDP in 2008 and, after a large spike in 2009, are projected to continue at about 22 percent of GDP through 2014. As a help in determining the cause of this rise in outlays, following is a more detailed version of the second graph in that post:

U.S. Federal Outlays: 1970-2014

In addition, following is a table that shows the change in the nine major components of actual federal outlays from 2000 to 2008 and of projected federal outlays from 2008 to 2014:

CHANGE IN FEDERAL OUTLAYS (percentage of GDP)

Commerce Undist.
National Income Social Net & Housing Offsetng Other Total
Years Defense Health Medicare Security Security Interest Credit Receipts Outlays Outlays
----- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
00-08 1.300 0.382 0.717 0.419 0.121 -0.519 0.163 -0.168 0.129 2.544
08-14* -0.825 0.348 0.711 -0.223 0.260 0.725 -0.485 0.064 0.293 0.869
----- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
00-14* 0.474 0.730 1.428 0.196 0.381 0.206 -0.322 -0.104 0.422 3.413

* estimated

The actual numbers used to create this graph and table can be found at this link. As can be seen, total outlays rose about 2.5% of GDP from 2000 to 2008 and are projected to rise another 0.9% of GDP from 2008 to 2014. Following is a short summary of each of the nine components of federal outlays, listed in decreasing order of their size over the entire period from 2000 to 2014:

1) Medicare rose about 0.7% of GDP from 2000 to 2008 and is projected to rise another 0.7% of GDP from 2008 to 2014. Hence, it is projected to rise a total of 1.4% of GDP over the entire 14-year period.

2) Health is projected to rise about half as much as Medicare, a total of about 0.7% of GDP over the entire 14-year period.

3) National Defense spending rose about 1.3% of GDP from 2000 to 2008 but is projected to decrease about 0.8% of GDP from 2008 to 2014. That is the total increase of about 0.5% of GDP.

4) All other outlays rose about 0.13% of GDP from 2000 to 2008 and are projected to rise about 0.29% GDP from 2008 to 2014. That is a total increase of about 0.42% of GDP. The 3-line table at the bottom of this page shows that Veterans Benefits, International Affairs, and Education are the leading contributors at about 0.24, 0.17, and 0.15 percent of GDP, respectively.

5) Social Security rose about 0.12% of GDP and is projected to rise about 0.26% of GDP for a total increase of about 0.38% of GDP.

6) Net Interest dropped about 0.5% of GDP but is projected to rise back about 0.7% of GDP for a total increase of about 0.2% of GDP.

7) Income Security rose about 0.4% of GDP but is projected to drop back about 0.2% of GDP for a total increase of about 0.2% of GDP.

8) Undistributed Offsetting Receipts dropped about 0.17% of GDP but is projected to rise about 0.06% of GDP for for a total decrease of about 0.1% of GDP.

9) Commerce and Housing Credit rose about 0.16% of GDP but is projected to drop about 0.48% of GDP for a total decrease of about 0.32% of GDP.

Both the above graph and table show that Medicare and Health are projected to be the largest contributors to the increase in federal outlays. Together, they are projected to comprise about 63 percent of the total increase from 2000 to 2014. Page 171 of the Analytical Perspectives of the most recent U.S. Budget says the following on this topic:

The health reforms proposed in this budget are the key to achieving long-run fiscal stability. Without significant health reform it will be impossible to rein in Federal spending as required for fiscal stabilization, since in the absence of reform the Government’s major health programs – Medicare and Medicaid – are projected to be the most rapidly growing programs in the budget by a large margin. A successful health reform that slows the growth of per capita health care costs is also the essential ingredient for expanding health insurance coverage without permanently adding to the projected level of long-run spending.

In addition, the above graph and table show that Net Interest is projected to be the largest contributor from just 2008 to 2014. On this, page 174 of the Analytical Perspectives says the following:

Interest rates on Treasury securities fell sharply in late 2008, which brought both short-term and long-term rates to their lowest levels in decades. So far in 2009, short-term Treasury rates have remained near zero, and the ten-year yield remains near 3 percent. Investors have sought the security of Treasury debt during the heightened financial uncertainty of the last several months. In the projection period, interest rates are expected to rise as financial concerns are alleviated and the economy recovers from recession. The 91-day Treasury bill rate is projected to reach 4.0 percent and the 10-year rate 5.2 percent by 2013, at which point unemployment will have reached its long-run value and the annual growth rate of real GDP will have stabilized at 2.6 percent. These forecast rates are historically low, reflecting lower inflation in the forecast than for most of the post World War II period. After adjusting for inflation, the projected real interest rates are close to their historical averages.

Wednesday, December 2, 2009

Federal Outlays since 1940 and Their Role in Deficits

There has been a great deal of discussion about the role of spending in the current and past deficits of the federal government. Since the most commonly referenced deficit, the unified deficit, is equal to federal revenues minus federal outlays, deficits are affected by all items that affect revenues and outlays. These items include tax rates, economic activity, and spending. Regarding spending, I have posted a number of graphs and tables that look at spending from 1940 to 2014 at the following links:

Outlays in Billions of Current Dollars
Outlays as a Percentage of GDP

The following graph shows total federal outlays and receipts since 1940:

Federal Outlays and Receipts: 1940-2014

The actual numbers used to create this graph can be found at the second link. As can be seen, total receipts have mostly been in the 17% to 19% of GDP range in the 54 years since 1954. They have only dipped below 17% of GDP in five years, reaching a low of 16.1% of GDP in 1959 and they have risen above 19% in just nine years, reaching a high of 20.9% of GDP in 2000. However, they are projected to dip below the prior low in 2009, reaching a new low of 15.1% of GDP.

Outlays have been less stable. They were likewise in the 17% to 19% of GDP range for all but two years from 1954 through 1966. However, they then began to rise steadily, reaching a high of 23.5% of GDP in 1983. From there, they began a long decline, finally getting back in the 17% to 19% of GDP range in 1999 through 2001. However, they have now risen back to nearly 21% of GDP in 2008. Hence, one could argue that a major contributor to deficits was the steady increase in spending from 1966 to 1983 and from 2000 to 2008 with no corresponding increases in receipts. However, these deficits were also exasperated by the sharp drop in receipts from 1981 to 1983 and from 2000 to 2004 and were relieved by the growth in receipts from 1992 to 2000 and from 2004 to 2007.

The second link above shows outlays as a percentage of GDP. This is a useful measure of the stability (or lack thereof) of the growth in receipts and outlays. Because wages tend to grow at the same rate as the GDP, receipts tend to remain at the same percentage of GDP, given that tax rates and economic activity stay at the same relative level. If outlays can likewise be kept at the same percentage of GDP, then the budget can be kept at the same level of balance.

The following graph shows nine major components of federal outlays:

U.S. Federal Outlays: 1940-2014

The actual numbers for this graph can be found at the second link. In any event, following is a short summary of each of the nine components:

1) National Defense spending has been generally decreasing, going from 13.1% of GDP in 1954 to 4.3% of GDP in 2008. There were increases from 1979 to 1986 and from 1999 to 2008 but the overall trend has been down.

2) Social Security rose from 0.9% of GDP in 1954 to almost 5% of GDP in 1983 but it has since dropped back slightly to 4.3% of GDP.

3) Medicare has risen fairly steadily since its inception in 1967, reaching 2.7% of GDP in 2008.

4) Health (of which Medicaid grants comprised 71% in 2006) rose from under 0.1% of GDP in 1954 to nearly 1% of GDP in 1979 but stabilized at that level through 1990. From there, it began to rise, reaching nearly 2% of GDP in 2008.

5) Income Security consists of General and Federal Retirement and Disability, Unemployment Compensation, and Housing, Food and Nutrition, and Other Income Assistance. It was between 1 and 2 percent of GDP from 1949 through 1970, rose to 3.2% of GDP by 1975, and has been between 2.5 and 3.6 percent of GDP since then.

6) Net interest was between 1 and 2 percent of GDP from 1944 through 1980, rose to about 3% of GDP from 1985 through 1997, and has now dropped back to the 1 to 2 percent level.

7) Commerce and Housing Credit has been relatively small (less than 0.7% of GDP) since 1948 except for when it rose to over 1% of GDP in 1990 and 1991. This was due to an increase in Deposit Insurance spending to pay for the Savings and Loans bailout. In addition, it is projected to soar to 5.3% of GDP in 2009 as a result of the recent financial bailout.

8) Undistributed Offsetting Receipts consist chiefly of the payments federal agencies make to retirement trust funds for their employees and are counted as negative outlays. They have gone from about -1% of GDP in 1952 to -0.6% of GDP now.

9) All other outlays rose from 3.3% of GDP in 1954 to 5.9% of GDP in 1978 but dropped to a low of 2.9% of GDP by 1997. Since then, they have risen back to 3.2% of GDP. The third and fourth graphs at this link show a further breakdown of this other outlays category.

Wednesday, October 14, 2009

Do Balanced Budgets Cause Depressions? (Part 2)

My prior post suggested that the initial events that lead to financial crises are more likely wars, not the periods of paying down the resultant debt. The following graph shows the federal debt held by the public during major wars since 1790:

Federal Debt Held by the Public during Major Wars: 1790-2008

The actual numbers and sources can be found at this link. The graph shows the federal debt as a percentage of GDP, as opposed to my prior post which deals with the current dollar amounts. The debt as a percentage of GDP gives a better measure of our ability to service the debt since the government receipts used to pay the interest have remained around 18 percent of GDP for the past 50-plus years (see the first graph at this link).

In any event, the graph shows that there was a tremendous growth in the debt during the Civil War, World War I, and World War II. The growth in debt was much more rapid than any paydown in debt after the war. The growth in debt during the Mexican-American War and the War of 1812 was much more modest but the paydown in debt immediately following those wars was even less. Hence, the graph does agree with the conclusions of my prior post. Looking at the debt as a percentage of GDP does make the paydown in debt appear much more substantial but it still, for the most part, appears to be just a paydown of the tremendous debt run up during war years.

The relationship between the debt and war years reminded me of a similar relationship that I had noticed years ago. The following graph shows the CPI (Consumer Price Index) and M2 Money Supply since about 1800:

CPI and M2 Money Supply, 10-year change: 1800-2008

The actual numbers and sources for this graph can be found at this link. As can be seen, inflation has tended to increase during major wars though it did not during the smaller Mexican-War War. In addition, the growth in the M2 money supply has tended to increase during major wars since at least World War I. In fact, there appears to have been a positive correlation between the growth in the M2 money supply and inflation since World War I though this relationship seems to have broken down somewhat since about 2000. I had a discussion about this with Rodger M. Mitchell (who I mentioned in my prior post) at this link. He felt that the use of ten-year spans to "smooth" the data had in fact "ruined" it. But, as I explain in my comment of October 11th, even the graphs using five or one-year spans (shown here) show a correlation.

I also mentioned in my comment of October 7th that Thayer's claim that the six financial collapses that he lists "have been the only major depressions in U.S. history" is questionable. As I pointed out, I have seen 1907 mentioned as a possible depression in several places, including this article. Another article mentions that the U.S suffered a serious economic downturn at the start of the 1920s. The list of recessions on wikipedia lists the Depression of 1920-21 and the Panic of 1907. It also lists the first five of Thayer's six collapses (1819, 1837, 1857, 1873, 1893) as Panics. The sixth collapse in 1929 is, of course, listed as the Great Depression.

The Panic of 1907 and Depression of 1920-21 are significant in another way. Treasury data shows that the Panic of 1907 was preceded by rising debt, with the debt increasing from 1898 to 1913. The huge debt run up during World War I did decrease from 1919 to 1930 but, as this article mentions, that was through the recovery. Hence, the Panic of 1907 contradicts the notion that all depressions are preceded by decreases in debt and the Depression of 1920-21 contradicts the notion that deficit spending is an absolute necessity for recovery.

In any event, the above graphs again suggest that the initial events that lead to many financial crises are wars, not periods of paying down the resultant debt. For that reason, it would seem that our higher priority should be to find ways to prevent wars and their resulting cost in lives and treasure.

Sunday, October 4, 2009

Do Balanced Budgets Cause Depressions?

According to this link, Frederick C. Thayer, a professor of Public Administration at George Washington University, wrote an article titled "Do Balanced Budgets Cause Depressions?" for The Washington Spectator on January 1, 1996. Following is an excerpt:

Even though the sequence that begins with budget-balancing and ends with depression has been common in American history, the question of a linkage has been ignored. The following paragraphs include all the basic data:

1817-21: In a period of five consecutive years, the national debt was reduced by 29 percent, to $90 million. The first acknowledged major depression began in 1819.

1823-36: In a period of 14 consecutive years, the national debt was reduced by 99.7 percent, to $38,000, a virtual wipeout. This didn’t help either. A major depression began in 1837.

1852-57: In a period of six consecutive years, the national debt was reduced by 59 percent, to $28.7 million. A major depression began in 1857.

1867-73: In a period of seven consecutive years, the national debt was reduced by 27 percent, to $2.2 billion. A major depression began in 1873.

1880-93: In a period of 14 consecutive years, the national debt was reduced by 57 percent, to $1 billion. A major depression began in 1893.

1920-30: In a period of 11 years the national debt was reduced by 36 percent, to $16.2 billion. The sixth real depression -- the Great Depression -- began in 1929.

As opposed to many less important downward “business cycles” or recessions, these six collapses have been the only major depressions in U.S. history. The batting average is perfect -- six sustained periods of reducing the national debt followed by six major crashes.

Since 1791, these debt reduction crusades have colored 57 of the 93 years in which debt was reduced. The debt was increased in each of the 112 years, an indication that federal deficit spending has been anything but unusual. We have almost chronic deficits since the 1930s, and there has been no new depression since then -- the longest crash-free period in our history.

Other articles by Thayer from about the same time and containing the same numbers can be found here and here. According to this link, Thayer passed away in 2006 at the age of 82.

More recently, these same basic numbers have been posted by Rodger Malcolm Mitchell, author of the book "Free Money: Plan for Prosperity". Following is an excerpt from his website:

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001
2004-2008: Deficit Growth reduced 40%. Recession began 2008.

The first six sets of numbers are the same as Thayer's except that the second lists a debt reduction of 99% instead of 99.7%. In addition, he adds a 9% reduction in federal debt from 1998 to 2001 followed by the recession of 2001. It should be noted that this 9% reduction appears to be a reduction in the federal debt held by the public. Mitchell's figures link to this page which contains graphs showing Federal Debt Held by the Public (FYGFDPUN) and Federal Government Debt: Total Public Debt (GFDEBTN). According to the data for the series found here and here, the Debt Held by the Public went down by 11.3% but the Total Public Debt went up by 5.1% from 9/30/1998 to 9/30/2001. The difference is due to the fact that the Debt Held by the Public does not include the federal debt owed to Social Security and other federal trust funds. There are likely arguments in favor of using either of these two measures of debt. In any event, it's important to note the one that is being used.

Mitchell also adds a 40% reduction in deficit growth from 2004 to 2008. It is very interesting that he chooses to switch from "federal debt reduction" to "deficit growth" reduction. In fact, sticking with "federal debt reduction" would have resulted in data that would have run very much counter to his other data which shows depressions and/or recessions being preceded by reductions in debt. According to the figures for Federal Debt Held by the Public, the debt increased from $4303 billion on 09/30/2004 to $5814 billion on 09/30/2008, an increase of 35 percent in just 4 years!

In any event, following is a critique of Thayer's original numbers:

In order to evaluate Thayer's claim, one needs to look at all of the major changes in the debt during this period. The following table attempts to do that:

FEDERAL DEBT (in millions of dollars) AND PERCENT CHANGE

High Debt Low Debt
---------------------------- Prior Low High Prior Low
Year Debt Year Debt to High to Low to Low Events
---------------------------------------------------------------------------------
1804 86.43 1812 45.21 -47.69 War of 1812 (1812-15)
1816 127.33 1821 89.99 181.65 -29.33 99.04 Panic of 1819
1822 93.55 1836 0.04 3.96 -99.96 -99.96 Panic of 1837
1843 32.74 1846 15.55 87184.08 -52.51 41352.78 Mex-Amer War (1846-48)
1851 68.30 1857 28.70 339.25 -57.98 84.56 Panic of 1857
1861 90.58 215.61 Civil War (1961-65)
1866 2773.24 1873 2234.48 2961.61 -19.43 2366.84 Panic of 1873
1879 2349.57 1893 1545.99 5.15 -34.20 -30.81 Panic of 1893
1915 3058.14 97.81 World War I (1914-18)
1919 27390.97 1930 16185.31 795.68 -40.91 429.25 Great Depression

Source: Treasury Department: 1791 to 1849, 1850 - 1899, 1900 - 1949

The first period that Thayer cites is the five years from 1816 to 1821, when the debt was reduced by 29 percent. What Thayer fails to mention, however, is that in the four years from 1812 to 1816 (which includes the War of 1812), the debt was increased by 182 percent. Hence, the debt in 1821 was still nearly double it's level when the War of 1812 began.

The second period that Thayer cites is the 14 years from 1822 to 1836, when the debt was reduced by over 99 percent, to $38,000. This is the one period that Thayer cites when a recently acquired debt was not simply being partially paid down. In fact, the debt was paid down to its lowest level on record.

The third period that Thayer cites is the six years from 1851 to 1857, when the debt was reduced by 58 percent. Once again, Thayer makes no mention of the fact that the debt had just increased 339 percent in the prior five years, driven largely by the Mexican-American War. Even after the 58% decrease, the debt was still 85 percent above where it had been just 11 years earlier.

The fourth period that Thayer cites is the seven years from 1866 to 1873, when the debt was reduced by 27 percent (19 percent by the Treasury numbers in the above table). Thayer makes no mention that this immediately followed the Civil War during which the debt increased by nearly 3000 percent! Even after the 19 percent decrease, the debt was still nearly 25 times its size at the beginning of the war.

The fifth period that Thayer cites is the 14 years from 1879 to 1893, during which the debt was reduced by 57 percent (34 percent by the Treasury numbers in the above table). In fact, this represented a further paying down of the tremendous debt run up during the Civil War. Even after this 34 percent decrease, the debt was still about 17 times its size at the beginning of the Civil War.

The final period that Thayer cites is the 11 years from 1919 to 1930, during which the debt was reduced by 36 percent (41 percent by the Treasury numbers in the above table). This followed another war which Thayer saw no need to mention, World War I. In the four years from 1915 to 1919, the debt had increased by 796 percent. Even after the 41 percent decrease, the debt was still over 5 times its size at the beginning of World War I.

Hence, four of the six periods of surpluses that Thayer mentions followed wars during which the debt rose far more than it was paid down during those periods. Another of the periods (1879 to 1893) was just a further paying down of the tremendous debt run up during the Civil War. Hence, only one of the periods represented a seemingly voluntary paydown of debt not recently acquired through war.

The above timeline suggests that the initial events that lead to financial crises are wars, not periods of paying down the resultant debt.

Wednesday, August 19, 2009

The Long-Run Budget Outlook

As stated here, the OMB (Office of Management and Budget) released the final volumes of the President's FY 2010 Budget on May 11th, 2009. These included the Analytical Perspectives which contains a section on the long-run budget outlook. On June 25th, the CBO (Congressional Budget Office) released the Long-Term Budget Outlook. The following graph shows the outlook for the federal debt held by the public as projected by both documents.




The actual numbers and sources for this and the following graph are at http://www.econdataus.com/pro2010.html. As can be seen, the CBO document provides two projections, one for the "extended baseline scenario" and one for the "alternative fiscal scenario". The former appears to be very close to 2010 Budget projections. Regarding these projections, the 2010 Budget states the following on page 190 of the Analytical Perspectives:


The long-run budget projections in this section extend the particular policies proposed in the 2010 Budget, but do not reflect the long-term impacts from slowing health care cost growth. Although the Budget offers major initiatives in many areas that are needed to put the economy on a sounder long-run footing, the Administration recognizes that not all of the needed policy initiatives have been formulated. In particular, the Administration’s plans for health reform are still under development in consultation with Congress. The budget projections in this chapter reflect the fact that simply extending current laws and policies would leave the budget in an unsustainable position.


Similarly, following is a description of the two sets of CBO projections from page 1 of the CBO document:


The “extended-baseline scenario” adheres most closely to current law, following CBO’s 10-year baseline budget projections for the next decade and then extending the baseline concept beyond that 10-year window.1 The scenario’s assumption of current law implies that many policy adjustments that lawmakers have routinely made in the past will not occur.


The “alternative fiscal scenario” represents one interpretation of what it would mean to continue today’s underlying fiscal policy. This scenario deviates from CBO’s baseline even during the next 10 years because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past. Different analysts might perceive the underlying intention of current policy differently, however, and other interpretations are possible.


Hence, both the 2010 Budget and the CBO extended baseline projections are based on current law. The CBO alternative fiscal projections, on the other hand, are based on policies that are not written into current law but are "widely expected to occur and that policymakers have regularly made in the past". These assumptions are summarized in Table 1-1 in the CBO report. On the spending side, the main difference is that the alternative fiscal scenario assumes that physician payments from Medicare will be higher than under current law and that spending other than Social Security, Medicare, Medicaid, interest, and stimulus-related spending will remain at its projected 2009 share of GDP. On the revenue side, the main difference is that the alternative fiscal scenario assumes that the Bush tax cuts will be extended and that the AMT (Alternate Minimum Tax) parameters will continue to be adjusted for inflation as they have in the past.


The following table shows the estimated levels of spending and revenues (and the resulting deficits) in the year 2080 for all three sets of projections:


BUDGET PROJECTIONS FOR THE YEAR 2080 (percent of GDP)

2010 Extended Alternate Extended
Budget Baseline Fiscal - Alt
---------------- -------- -------- -------- --------
Primary Spending 27.0 31.7 34.4 2.7
Interest 11.2 11.9 30.3 18.4
---------------- -------- -------- -------- --------
Total Spending 38.2 43.7 64.7 21.0
Revenues 22.6 25.9 21.9 -4.0
---------------- -------- -------- -------- --------
Deficit -15.5 -17.8 -42.8 -25.0

As can be seen from the last column, the difference in revenues between the two CBO scenarios is somewhat larger than the difference in non-interest spending. Hence, the extension of the Bush tax cuts and AMT fix is projected to have a significant effect on the deficit and debt. However, the table also shows that, once the debt starts growing rapidly, interest costs likewise start growing rapidly and become the predominant problem. This is similarly shown in the following graph which shows the projected growth in outlays according to the 2010 budget.




As can be seen, net interest costs start rising rapidly starting in about 2020, in response to the rapidly rising debt. The non-interest outlay that appears to grow the fastest is Medicare.


It is important to note that these are projections based on current law, not predictions of what will actually happen. It is likely that something will change well before the debt reached such historically high levels. On this topic, page 192 of the Analytical Perspectives states the following:


These rising deficits would drive publicly held Federal debt as a ratio to GDP to levels well above the previous peak level reached at the end of World War II and beyond. Before the debt reaches the levels shown in the table, there would likely be a financial crisis that would force budgetary changes, although the timing of such a crisis and its resolution are impossible to predict. Timely reforms, especially those that lowered the trend of health care costs, could go far to avoid such a crisis.

Thursday, May 28, 2009

California's Budget Crisis

As reported by numerous news sources, California now faces a $21.3 billion gap between revenues and spending. Many have attributed this gap chiefly to increases in spending. For example, a February 18th article from the Reason Foundation is titled "What Caused the Budget Mess? California's Spending Has Nearly Tripled Since 1990". According to the article, state spending (including the General Fund, special funds, and bond funds) has nearly tripled from $51.4 billion in FY 1990-91 to $144.5 billion in FY 2008-09. The numbers in the first table at this link agree with the 1990-91 figure but show $136.2 billion in 2008-09. The small difference is likely because this latter figure is an estimate which continues to change. Still, this represents an increase of 165 percent.


The problem with this comparison is that the figures are not corrected for inflation or the growth in California's population. In fact, the article states the following in a later paragraph:


If California had simply limited its spending increases to the 4.38 percent average increase in the state's consumer price index and population growth each year since FY 1990-91, the California would be sitting on a $15 billion surplus right now.


Hence, the article seems to admit that this a more valid way to compare the figures. Another commonly used method to compare revenue and spending figures is to take their values as a percentage of the economy and compare those. This is reasonable in that revenues tend to generally grow in line with the economy from which they are drawn. The following graph shows California budget expenditures as a percentage of the California gross domestic product.




The actual numbers and sources for this and the following graph can be found at the aforementioned link. The numbers do show that expenditures (excluding federal funds) rose from a low of 6.33% of state GDP in 1994 to a high of 7.97% of state GDP in 2002. In retrospect, it would have been wise to restrain this increase. Still, the graph shows that there has not been the runaway increase in spending that many have described. In addition, there may be a reasonable explanation for the slight increase in spending. Following is a paragraph from a May 8th editorial in the Los Angeles Times that addresses this issue:


While spending has increased over time, the growth in spending reflects demands imposed by a population that is growing, aging and becoming more diverse. In the last year alone, California has added more than 408,000 new residents, nearly equal to the population of Sacramento. And, critically important from a budgetary standpoint, the fastest-growing segment of the population is the elderly, increasing demands on health and age-dependent services. About 60% of the nursing home days in California, for example, are paid for by Medi-Cal, the publicly supported health program for low-income Californians.


The problem of increased entitlement spending as the population ages is likewise a national problem. Another shared problem is shown in the following graph:




The graph shows that the interest costs on general obligation and lease-revenue bonds are projected to hit a new 30-year high. Hence, the cost of servicing its debt is a growing concern for California just as it arguably is for the nation as a whole.

Monday, March 16, 2009

Major Foreign Holders of Treasury Securities (update)

According to a number of news stories, Chinese Premier Wen Jinbao expressed concerns about China's holdings of U.S. government debt on March 13th. Following is the opening paragraph in a March 14th article in the Washington Post:


Exerting its new influence as the U.S. government's largest creditor, China yesterday demanded that the Obama administration "guarantee the safety" of its $1 trillion in American bonds as Washington goes further into debt to combat the economic crisis.


Further on, the article states:


China surpassed Japan last year as the largest foreign holder of Treasury bonds. Any indication that it intends to cease those purchases -- or, worse, stage a sell-off -- could drive up the cost of borrowing for the U.S. government, as well as send mortgage rates higher for millions of Americans.


To my knowledge, the chief source for the amounts of Treasuries held by foreign countries is the Treasury Department. Each month, it posts updated estimates of the foreign holdings of U.S Treasuries by country at this link. It also posts estimates going back to March 2000 at this link. The following graph shows the totals for all countries by the type of treasury security and the totals for the four countries (or groups of countries) with the largest holdings at the end of 2008.




The blue line shows the grand total of all treasury securities held by all foreign countries, private and public. As can be seen, it has been increasing steadily since early 2002 and accelerated sharply at the end of 2008. The yellow line shows those securities held by "official institutions", defined on page 7 of the Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2004 as follows:


Official institutions consist primarily of national government and multinational institutions involved in the formulation of international monetary policy, but also include national government-sponsored investment funds and other national government institutions. Data on such institutions are collected separately because the motivations behind holdings of official institutions may differ from those of other investors.


The dark blue line just below the yellow line shows the totals for bonds and notes which are that portion of the total securities that are long-term debt securities, with an original
maturity of over one year. As can be seen, this long-term debt has not been increasing over the past half-year. Hence, the increase over this period appears to have been totally in short-term debt. More details on short-term and long-term debt securities can be found on page 7 of the Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2007.


The other four lines show the holdings of the four categories of countries with the largest holdings. These can be seen in more detail in the following graph which shows the holdings of the eight countries with the largest holdings:




The actual numbers and sources for both of the above graphs can be found at this link. As can be seen, the holdings of Mainland China has risen steadily since early 2002, increasing nearly ten-fold from $76.5 billion in February of 2002 to $727.4 billion at the end of 2008. As mentioned in the article, China did surpass Japan as the largest foreign holder of Treasuries in September of 2008. In fact, Japan's holdings reached a maximum of $699.4 billion in August of 2005 and have fallen to $626 billion now. Also, I noticed a few other interesting things in the data. The United Kingdom's holdings soared from $50 billion in June of 2007 to $271.2 billion in May of 2008 and then dropped back to $55 billion in June of 2008. In fact, there appears to be a large continuing discontinuity between each annual survey for the United Kingdom causing a large saw-tooth effect in the graph. If anyone knows the reason for this, please leave a comment.


In any case, there are a number of other countries whose holdings have increased rapidly for some portion of the past eight years. The holding of Oil Exporters have more than quadrupled from $43.9 billion in January of 2004 to $186.2 billion now. The holdings of Brazil went up by more than a factor of ten from $14 billion in January of 2005 to $158 billion in June of 2008 but have sunk back somewhat to $127 billion now. The most recent rapid increase has been in the holdings of Russia which has gone up by more than a factor of fifteen from $7.4 billion in March of 2007 to $116.4 billion now. I would guess that most of this investment from Oil Exporters, Brazil, and Russia came from income from resources, chiefly oil. With oil having fallen from a high of $147 per barrel last July to the mid-forties now, it would have seemed likely that future investment in Treasuries by these nations would have fallen. However, only Brazil's investment had begun to decrease by the end of 2008. In addition, it would seem possible that China's future investment might slow due to it's own stimulus plans or for other reasons. The Washington Post article says the following on that topic:


Wen, however, stopped far short of saying China would cease purchasing Treasurys. Although analysts say China may already be moving to curb some purchases of U.S. debt, any move to sell off its current holdings would severely deflate their value on world markets -- hurting the Chinese as well as the Americans. Years of red-hot growth have allowed China to build up the world's largest reserves -- some $2 trillion. But analysts say almost half are held in U.S.-government-backed debt.


One final item of note is that the Washington Post article mentions Chinese holdings of "$1 trillion in American bonds". However, the Treasury figures show that China held just $727 billion in treasuries at the end of 2008. It seems likely that the $1 trillion figure includes holdings in Fannie Mae and Freddie Mac bonds. A September 18th New York Times article stated the following regarding China:


Its bond holdings of government-sponsored enterprises, estimated by credit rating agencies at $340 billion, rose in value by billions of dollars in a single day when the Bush administration made explicit the government guarantee of Fannie Mae and Freddie Mac bonds, causing their interest rate spreads compared with Treasury bonds to narrow by 5 to 35 basis points within hours.


The exact amount of China’s gain cannot be calculated without knowing the maturity and composition of its holdings of these bonds, which Chinese officials have not released, according to specialists in fixed-income securities.

Monday, March 2, 2009

Fiscal Year 2010 Budget Overview Document

An overview of the fiscal year 2010 U.S. Budget was released on Thursday, February 26th. A link to the overview can be found on this page, along with the following description:


A New Era of Responsibility: Renewing America’s Promise, provides a description of the Obama Administration’s fiscal policies and major budgetary initiatives. This document is an overview of the full Fiscal Year 2010 Budget expected to be released this spring.


The overview contains 9 summary tables which give actual budget numbers for 2008 and projected numbers for 2009 through 2019. These numbers can be combined with historical budget numbers from the prior budget to look at historical and projected budget data from 1940 through 2019. The following graph shows selected measures of the deficit since 1970:




The most commonly discussed measure of the deficit is the unified deficit, shown in purple. The graph shows the actual values of the unified deficit through 2008 and projected values from 2009 forward. In addition, the dotted purple line shows the projected values of the unified deficit from last year's budget. The actual numbers and sources can be found at this link.


As can be seen, the extraordinary financial crisis has caused the outlook for the unified deficit to change radically. The prior budget projected that it would become a surplus in 2012 while the current budget projects that it will skyrocket to $1.75 trillion this year and decrease to $581 billion by 2012.


In any event, the graph also shows the change in the debt held by the public (the blue line), referred to as the public deficit. This is usually very close to the unified deficit as the government must generally make up for the difference between receipts and outlays by borrowing from the public. However, the graph and table show that the debt held by the public is projected to increase by $2.56 trillion in 2009, well over the projected unified deficit of $1.75 trillion. Table S-9 in the overview shows that this difference is chiefly due to Direct loan accounts ($482 billion), Troubled Asset Relief Program (TARP) equity purchase accounts ($202 billion), and Financing accounts for potential additional financial stabilization efforts ($432 billion).


Finally, the graph shows the change in the gross federal debt (the red line), referred to as the gross deficit. This is equal to the public deficit plus those monies borrowed from Social Security and the other trust funds. As can be seen, the gross deficit is projected to reach $2.72 trillion in 2009, descend to just under a trillion dollars per year by 2012, and maintain that general level until 2019.


Regardless of the significance of the deficit, the federal debt is arguably more critical. Afterall, it is the debt, not the deficit, that we are paying interest on every year. The following graph shows selected measures of the U.S. debt since 1940:




The actual numbers and sources for this graph can be found at this link. As can be seen, the gross federal debt is projected to jump from 70.2% of GDP to 89.2% of GDP in 2009 and reach 98.3% of GDP by 2011. As the graph shows, that is not far from the historic peak that we reached in World War II. Unlike the end of that war, however, there is no sharp drop in the debt to GDP ratio when the current economy improves. That is because the budget is projected to stay well in deficit through 2019 with unified deficits around 3 percent of GDP and gross deficits around 5 percent of GDP. That's very unlike the end of World War II when the drop in war expenditures allowed the budget to achieve approximate balance for the next decade or more.


On the positive side, the overview contends that these numbers are more realistic than some prior budgets. On page 36, it states:


This Budget, therefore, provides a projected cost for the wars in Iraq and Afghanistan; does not assume that all of the 2001 and 2003 tax legislation magically disappears at the end of 2010; does not allow the alternative minimum tax to take over the tax code, which almost every observer agrees is unrealistic; recognizes the statistical likelihood of natural disasters instead of assuming that there will be no disasters over the next decade; includes a contingent reserve as a placeholder in case further legislative action becomes necessary to stabilize the financial system; and provides a 10-year rather than a 5-year look into our fiscal situation.


Of course, projections are likely to become less and less accurate the further into the future they extend. Look at the radical change in projections that the current financial crisis caused in just one year. Still, it seems responsible to at least attempt to plan for the future, especially the relatively near future of ten years. Even more important, it seems critical to provide the public with numbers that are as realistic as possible. The more accurate a picture that the electorate has of our current situation, the more likely they are to support those actions which will best address it.

Tuesday, February 17, 2009

Job Growth Under Bush and Prior Presidents

On February 6th, the Bureau of Labor Statistics (BLS) released its Employment Situation report for January of 2008. Following is the opening paragraph:


Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors.


The following graph shows the labor force, household survey employment, nonfarm employment, and unemployment rate since 1998:




The actual numbers and sources for this and the following graph can be found at this link. As can be seen, employment has decreased and the unemployment rate has increased sharply since December 2007, especially in the past few months. Also noticeable is the fact that the labor force has dropped off for the past three months. However, much of the drop in the last month was due to adjustments to population estimates for the Household Survey. The BLS Employment Situation report states:


The adjustment decreased the estimated size of the civilian noninstitutional population in December by 483,000, the civilian labor force by 449,000, and employment by 407,000; the new population estimates had a negligible impact on unemployment rates and other percentage estimates.


In any event, the following graph shows the items shown in the prior graph, plus population and private employment, since 1950:




As can be seen, the current unemployment rate of 7.6 percent is the worst since the 1980-82 recession but is still well below the level of 10.4 percent reached in January of 1983. However, it also shows that the growth in employment, especially private employment, has been especially poor over the past eight years. In fact, private employment has increased just 407 thousand over that period. That works out to an average of just 4.24 thousand jobs per month. More on this can be found in an article that I've just updated titled Job Growth Under Bush and Prior Presidents.

Monday, February 2, 2009

Real GDP Growth

Note: There is a updated version of this post at this link.

On January 30th, the Bureau of Economic Analysis issued its initial estimates of the real gross domestic product in the fourth quarter of 2008. Following is the beginning of the accompanying news release:


Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.


The Bureau emphasized that the fourth-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The fourth- quarter “preliminary” estimates, based on more comprehensive data, will be released on February 27, 2009.


The release goes on to describe the components that contributed to the decrease:


The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by positive contributions from private inventory investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.


Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports.


The BEA also released an updated spreadsheet containing the annual GDP figures since 1929 and quarterly GDP figures since 1947. The following graph shows the change in the annual real GDP figures since 1940:




The actual numbers and sources for this and the following graph can be found at this link. The blue line shows the yearly change in the annual real GDP and the yellow and red lines show the 5-year and 10-year annualized changes, respectively. The following graph shows the change in the quarterly real GDP figures since 1960:




As before, the blue, yellow, and red lines show the 1-year, 5-year, and 10-year annualized changes in the quarterly real GDP. As can be seen, the 1-year change is the most volatile, the 5-year annualized change is less so, and the 10-year annualized change is even less so. In fact, the graph shows that the 10-year annualized change has been relatively stable since 1974, remaining between 2 and 4 percent for that entire period. Much of that apparent stability is due to the fact that 10 years just happen to be close to the length of several of the past business cycles. Recall that the prior three recessions were in 2001, 1990-91, and 1980-82. In fact, it is instructive to look at GDP growth over entire business cycles. The following table shows real GDP growth over all business cycles (taken from trough to trough) since 1949 as determined by the National Bureau of Economic Research:


REAL GDP GROWTH BY BUSINESS CYCLE

GDP GDP Last Quarter Entire Cycle
(billion (billion ---------------- --------------------------
current chained Percent Annual- # of Percent Annual- Prior
Year Qtr dollars) 2000 $) Change ized Quarters Change ized Trough Trough
---- --- -------- -------- ------- ------- ------- ------- ------- ------ -------
1949 4 265.2 1629.9 -1.0 -4.0
1954 2 376.0 2044.3 0.1 0.4 18 25.4 5.16 1949q4 1954q2
1958 2 458.1 2243.4 0.6 2.4 16 9.7 2.35 1954q2 1958q2
1961 1 527.9 2491.2 0.6 2.4 11 11.0 3.88 1958q2 1961q1
1970 4 1052.9 3759.8 -1.1 -4.2 39 50.9 4.31 1961q1 1970q4
1975 1 1570.0 4237.6 -1.2 -4.7 17 12.7 2.85 1970q4 1975q1
1980 3 2786.6 5107.4 -0.2 -0.7 22 20.5 3.45 1975q1 1980q3
1982 4 3314.4 5189.8 0.1 0.4 9 1.6 0.71 1980q3 1982q4
1991 1 5888.0 7040.8 -0.5 -2.0 33 35.7 3.77 1982q4 1991q1
2001 4 10226.3 9910.0 0.4 1.6 43 40.8 3.23 1991q1 2001q4
2008 4 14264.6 11599.4 -1.0 -3.8 28 17.0 2.27 2001q4 2008q4*

* 2008, quarter 4 has not been identified as a trough. It is just the most recent quarter.

Some of the business cycles are arguably too short to provide meaningful data. The following table combines the shorter business cycles to remedy this:

REAL GDP GROWTH BY BUSINESS CYCLE (shorter cycles combined)

GDP GDP Last Quarter Entire Cycle
(billion (billion ---------------- --------------------------
current chained Percent Annual- # of Percent Annual- Prior
Year Qtr dollars) 2000 $) Change ized Quarters Change ized Trough Trough
---- --- -------- -------- ------- ------- ------- ------- ------- ------ -------
1949 4 265.2 1629.9 -1.0 -4.0
1961 1 527.9 2491.2 0.6 2.4 45 52.8 3.84 1949q4 1961q1
1970 4 1052.9 3759.8 -1.1 -4.2 39 50.9 4.31 1961q1 1970q4
1980 3 2786.6 5107.4 -0.2 -0.7 39 35.8 3.19 1970q4 1980q3
1991 1 5888.0 7040.8 -0.5 -2.0 42 37.9 3.10 1980q3 1991q1
2001 4 10226.3 9910.0 0.4 1.6 43 40.8 3.23 1991q1 2001q4
2008 4 14264.6 11599.4 -1.0 -3.8 28 17.0 2.27 2001q4 2008q4

As can be seen, the table now contains 5 groups from 1949 to 2001, each containing one or more full business cycles and being about 10 or 11 years in length. The last span from 2001 to 2008 is technically not a full cycle since an ending trough has not yet been determined by NBER. Still, the annualized growth in real GDP for these groups agree pretty much with the 10-year change seen in the graphs above. Real GDP growth from 1949 to 1970 was around 4 percent and was generally slightly above 3 percent from 1970 to 2001.


Since 2001, however, real GDP growth has been almost a full percentage point less than it was from 1970 to 2001. As mentioned, this period does not yet represent a full business cycle. However, the annualized rate of growth is unlikely to get any better between now an what turns out to be the final trough. Of course, there are all sorts of possible reasons for this slower GDP growth. Still, the data appears to provide no evidence that the Bush tax cuts served to increase real GDP growth.

Note: There is a updated version of this post at this link.

Sunday, January 25, 2009

The Budget and Economic Outlook: Fiscal Years 2009 to 2019

On January 7th, the Congressional Budget Office (CBO) released its latest budget and economic projections. The report is titled The Budget and Economic Outlook: Fiscal Years 2009 to 2019. The following graph shows the deficit under selected policy alternatives as projected by this report:




The actual numbers and sources for this and the following graph can be found at this link. As can be seen, the baseline deficit (the purple line) is projected to plunge to $1.2 trillion in 2009 and recover over the next three years, stabilizing to just over $200 billion per year from 2012 through 2019. However, other means of financing will cause the debt held by the public to increase an additional $313 billion in 2008 and $204 billion in 2009. The report explains this other financing on pages 18 to 20 as follows:


Federal Debt. In most years, the amount of debt that the Treasury issues roughly equals the annual budget deficit, although a number of other factors also affect the government’s need to borrow money from the public. In a typical year, those factors might total $10 billion to $30 billion. However, the Treasury’s actions aimed at stabilizing the financial markets added more than $300 billion to the Treasury’s borrowing needs in 2008 (on top of the borrowing necessary to finance the budget deficit) and will boost them by about an estimated $200 billion in 2009 (see Table 6).


In 2008, the Treasury borrowed about $300 billion to deposit at the Federal Reserve to help it finance initiatives to enhance liquidity in the credit markets. CBO anticipates that the Treasury will withdraw those balances later this year, thereby reducing borrowing needs for 2009 by the amount deposited last year.


In the other direction, the cash flows for two programs will lift the Treasury’s borrowing needs by more than $700 billion. For the TARP, CBO’s baseline includes outlays of about $180 billion for 2009, but the Treasury is likely to have to borrow $460 billion more than that to cover the capital purchases, loans, and other activities of the program this year. Additionally, the Treasury is purchasing mortgage-backed securities from the private market; CBO assumes that such purchases will total nearly $250 billion this year, thereby necessitating additional borrowing of a similar amount (although the budgetary impact of the purchases, shown as an estimated subsidy amount in 2009, is relatively small).


One other factor affects the gap between the projected deficit and anticipated borrowing. Although CBO is treating Fannie Mae and Freddie Mac as part of the federal budget, most of the cost recorded for 2009 reflects a present-value calculation rather than a cash outflow; consequently, the projected deficit overstates borrowing requirements in that respect by about $220 billion.


This explains the other financing in 2008 and 2009. However, Table 6 on page 19 shows that there will be an additional inflow to the Treasury from 2010 through 2019. This inflow will be especially large in 2013 ($215 billion) and 2018 ($396 billion). I did not find much additional explanation of this inflow in the report but the Table 6 shows that most of it is in the TARP program. I assume that it comes from the selling of assets and/or repayment of loans. In any case, the baseline deficit adjusted by these other means of financing is shown by the orange line in the graph above. As can be seen, the large inflow in 2013 leads to a relatively small deficit of $42 billion and the large inflow in 2018 leads to a surplus of $208 billion.


This adjusted baseline deficit makes the assumption that the Bush tax cuts expire as currently scheduled and that the Alternative Minimum Tax (AMT) is not adjusted as it has been in the past. The report explains this on pages 24 and 25 as follows:


Revenues. The baseline assumes that the major provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—such as the introduction of the 10 percent tax bracket, increases in the child tax credit, the repeal of the estate tax, and lower rates on capital gains and dividends—will expire as scheduled at the end of 2010. On balance, the tax provisions that are set to expire during the 10-year projection period reduce revenues; thus, under a scenario in which they were extended, projected revenues would be lower than the amounts indicated in the current baseline. For example, if all expiring tax provisions (except those related to the amount of the exemption for the AMT) were extended, total revenues over the 2010–2019 period would be about $3.0 trillion lower than in the projection in the current baseline.


Another change in policy that could affect revenues involves the modification of the AMT, which many observers believe will not be maintained in its current form. Because the AMT’s exemption amount and brackets are not indexed for inflation, the impact of the tax will grow in coming years as more taxpayers become subject to it. If the AMT was indexed for inflation after 2008 and no other changes were made to the tax code, federal revenues over the next 10 years would be about $0.6 trillion lower than the amount in the baseline.


Because the number of taxpayers who are subject to the AMT will depend on whether the tax provisions originally enacted in 2001 and 2003 remain in effect, the combination of indexing the AMT for inflation and extending the expiring provisions would reduce revenues by more than the sum of the effects of each policy enacted alone. The interactive effect would lower revenues by an additional $0.6 trillion between 2011 and 2019.


The yellow line in the graph above shows the projected adjusted baseline deficit (the annual increase in the debt held by the public) if the Bush tax cuts are extended. As can be seen, this would have a relatively large effect, growing from $170 billion in 2011 to $568 billion in 2019. The blue line shows the additional effect of reforming AMT such that it is indexed for inflation. It would have a much smaller effect, growing from $36 billion in 2012 to $131 billion in 2019. The interactive effect of indexing the AMT for inflation and extending the expiring provisions mentioned in the prior paragraph is not shown in the graph above but is relatively small, similar in size to the effect of just indexing the AMT for inflation (the gap between the yellow and blue lines).


In any event, the deficit shown by the blue line (adjusted for other financing, extending the tax cuts, and reforming the AMT) includes surpluses borrowed from the Social Security trust fund. The green line shows the projected deficit if these surpluses were excluded. The red line shows the projected deficit if the surpluses borrowed from other trust funds were also excluded. That is, the red line shows the projected deficit if other financing, extending the Bush tax cuts, reforming AMT, and borrowing from the Social Security and other trust funds are also included. This would be the increase in the gross federal debt under these conditions.


The following graph shows the projected gross federal debt under the baseline and selected policy alternatives as a percentage of GDP:




As can be seen, the gross federal debt is projected to increase sharply from 70.2 percent of GDP in 2008 to 85.4 percent of GDP in 2011. It is then projected to decrease steadily to 71.7 percent of GDP in 2019, nearly recovering to its 2008 level. If the Bush tax cuts are extended, however, the gross federal debt is projected to continue its increase, jumping to 93.6 percent of GDP in 2011 and growing to 97.7 percent of GDP by 2019. If the AMT is also indexed for inflation, the debt is projected to increase to 101.1 percent of GDP by 2019. This would approach the high of 121.7 percent of GDP reached in 1946 at the end of World War II. Unfortunately, there is no event similar to the end of a war that is projected to help constrain deficits. On the contrary, the rising costs of the aging of the population is likely to create more budget pressures. On page 31, the report says the following:


High deficits in the near term may be inevitable in the face of the financial crisis and severe economic weakness, However, once the nation gets past this downturn, it will still face significant fiscal challenges posed by rising health care costs and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would probably constrain long-term economic growth by reducing national savings and investment, which in turn would cause productivity and wage growth to gradually slow.


Hence, it seems that we need to carefully consider the cost of extending the Bush tax cuts as well as the rising cost of health care and the aging of the population.

Monday, January 12, 2009

Worst Job Losses Since 1945?

On January 9th, the Bureau of Labor Statistics (BLS) released its Employment Situation report for December of 2008. Following is the opening paragraph:


Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.


A number of news articles stated this to be the worst job losses since 1945. For example, a Wall Street Journal article was titled "Yearly Job Loss Worst Since 1945" and a CNN Money.com article was titled "Worst year for jobs since '45". In fact, the preliminary figures for the loss of nonfarm jobs in 2008 is 2.589 million jobs and this is the highest figure since 2.75 million jobs were lost in 1945. The following graph from the BLS shows the annual nonfarm job losses since 1940:




The actual numbers and sources for this and the following graph can be found at this link. As can be seen, the job loss in 2008 was slightly more than the loss in 1982 and was the worst loss since 1945. However, some have pointed out that the labor force has grown greatly since 1982 and that the 2008 job loss is actually less in percentage terms. The following graph from the BLS shows the annual nonfarm job losses since 1940 in terms of percentage:




As can be seen, the 2008 job loss of 1.9 percent was less than the 1982 job loss of 2.3 percent and significantly less than the 1945 and 1949 job losses of 6.6 and 3.4 percent, respectively.


However, the CNN Money.com article did address this concern in the following excerpt:


"We have a bigger economy now, but even on a proportional basis, the last months have been the worst since [1945]," said Kurt Karl, head of economic research at Swiss Re. "It's just an enormous acceleration of job losses."


This acceleration is shown in a chart included with the article and is reflected by the Employment Situation report which states that payroll employment fell by 1.9 million over the last 4 months of 2008.


One other way in which the current job losses seem to rate very badly is over the longer term. The tables at this link show that only about three million jobs have been created in the past eight years. This is an increase of just 2.3 percent, the lowest since before the 1939 to 1947 period (the earliest covered by the BLS data). The lowest since then was 7.1 percent from 1952 to 1960. The 2.3 percent figure does measure from a peak to the current low but this is still a historically low figure.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

Contact Me

Name

Email *

Message *