Advancing a Free Society

Deficits are an important but incomplete metric

Sunday, March 27, 2011

The budget debate will soon expand beyond the current short-term fight. Negotiations on appropriations funding for the remainder of FY11 continue, and a government shutdown on April 9th is quite possible. I will write about that battle as events dictate, but hope to focus most of my attention on the more important big fiscal picture.

The following discussion may seem a bit theoretical. I think it’s an important starting point.

Washington traditionally focuses its attention on the federal budget deficit, the difference between government spending and revenues. We need to expand our scope and think about two allocation decisions made in each year’s budget debate.

The first decision is how much of society’s resources we want to allocate to the federal government. For sixty years from 1950-2009 this number was surprisingly stable. Total federal government spending averaged about 20% of GDP. The other four-fifths was private sector spending by individuals, families, and private businesses, plus spending by State & local governments.

A better and more difficult analysis would compare the allocation of resources between the public and private sectors. Since Washington directly decides only how much the federal government will spend, we end up with federal government vs. everything else.

The second decision is the timing of how we want to allocate the financing of that government spending over time. How much of this year’s federal government spending should be financed through current taxes, and how much through future taxes? Over that same 60-year period, that 20% of federal spending was allocated 18-2. Federal taxes averaged about 18% of GDP, and budget deficits averaged about 2% of GDP.

Continue reading Keith Hennessey…

(photo credit: Harvard Avenue)