Paul Krugman on Current Federal Deficit Spending

(Posted 4/28/2012) - Krugman has put together 4 simple charts that very clearly explain the rise in federal deficit spending since the crash of 2008.... and it isn't about increases in federal spending on new programs (as you may have heard). Instead it's about dramatic decreases on the revenue side and increases in demands on existing safety-net programs and revenue sharing to states in need.

Take a look at the CBO and FRED data that follows to learn what has been driving the last 3 years of deficit spending.

The NYT article that is extracted below can currently be found here.

Here is the full Krugman article... click on images to enlarge them.

Here's an exercise I did for my own edification - and to prepare for questions on book tour - but others may be interested in the results. I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy, but how do we show that without getting too much into the weeds?

Well, here's a quick and dirty approach. Suppose that spending and revenues would, in the absence of the slump, have risen at 5 percent per year - roughly GDP growth plus inflation, and actually a bit slower than actual spending growth (6 percent per year) from 2000 to 2007. With this assumption, I can draw three charts for the federal government (using CBO data) and one for state and local (using FRED) that, I think, tell the story.

First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the "No recession" line shows what would have happened if federal revenue had grown 5 percent per year after 2007:

That's about an $800 billion per year shortfall.

What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:

What's that $300 billion about? Well, they're mainly about the category CBO calls "income security", mainly food stamps and unemployment insurance:

Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending - Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can't find work.

So basically, the federal deficit is all, yes all, about the recession and aftermath.

And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that's not crucial):

So the reality is that we have deficits because the economy is depressed, but relative to previous policy we've been imposing fiscal austerity, not stimulus.