Advancing a Free Society

Understanding the Stimulus Debate: It’s Not 2001 Anymore

Friday, September 23, 2011

Today E21 published my piece explaining why unearthing 2001 quotes on the advantages of fiscal stimulus is highly misleading under current circumstances.


Federal policy makers are currently battling multiple problems, including both unsustainable budget deficits and a stubbornly sluggish economy. Invoking our 2001 experience to argue for more stimulus, as many have done, fundamentally misreads our current circumstances. 2001 was a case study in when policy makers gravitate to fiscal stimulus, as shown below in some detail.

Tax Revenues and Spending: In FY2000, federal revenue collections equaled 20.6% of GDP, the highest since World War II. Revenues dipped slightly in FY2001 to 19.5% of GDP but were still higher than in any year from 1982-1997 inclusive. Spending levels in FY2000-01 were at 18.2%, the lowest since 1966.

Budget Balance: The FY2000 budget surplus was 2.4% of GDP, the largest in more than half a century. FY1998-FY2001 were each rare years of unified budget surplus.

Federal Debt: By the end of FY2001, publicly-held federal debt was 32.5% of GDP, the eighth straight year of decline, and the lowest level since 1982.

How do things compare now, in 2011?

Tax Revenues and Spending: Federal spending in FY2011 is scheduled to be 23.8% of GDP, as it was in FY2010. Along with 25.0% of GDP in FY2009 these are the three highest-spending years as a share of the economy since 1946. Never outside of a world war have we spent so much so fast. This spending well exceeds tax revenues, which are 15.3% of GDP.

Budget Balance: CBO estimates the FY2011 federal deficit at 8.5% of GDP. This follows deficits equal to 8.9% of GDP in FY2010 and 10.0% of GDP in FY2009.

Federal Debt: Debt held by the public is projected to be 67.3% of GDP by the end of FY2011, the highest since 1950 and the fourth straight year of increase. In CBO’s “current policy” (more realistic) projection baseline, this debt will escalate to uncontrollable levels in the upcoming years as the Baby Boomers swell the ranks of Social Security/Medicare beneficiaries.

Unlike 2001, this is not a moment when, flush with surplus cash, federal policy makers returned revenue to taxpayers to help head off a recession. Today we are instead already a full three years into a policy of uncontrolled deficit spending, the likes of which America has never seen before. The bottom line: it’s not 2001 anymore. As policy makers wrestle with our current multiple fiscal and economic challenges, we should avoid making false analogies between conditions in 2001 and those in evidence now.

See the full article here.