Nouriel Roubini Says Raise Taxes to Fix Federal Deficit?!

I have long been a fan of Nouriel Roubini, but some recent comments of his made from Leen’s Lodge in Grand Lake Stream, Maine has me reconsidering my fan-hood. (Note: Due to conflicts, I was unable to attend this year’s event where, one year ago, the idea for this blog blossomed).

In this interview with Bloomberg, Roubini states that taxes should have been raised in order to tackle the deficit problem and avoid the recent S&P credit downgrade (clip around the 13 minute mark). He went on to say that the deficit can not be reduced “only on the spending side.”  Really?!

Of course, that is an empirical question, so let’s now turn to the data to see where the source of the deficit is coming from–lack of revenue or run-away spending. The charts below are all created from the data from the Congressional Budget Office.

Chart 1 shows federal outlays and revenue from Fiscal Year (FY) 2007 to 2021.  The chart basically shows that we are being lied to in the sense that the so-called stimulus package, which by definition are supposed to be temporary, is in fact a permanent increase in federal spending (red line). Between FY 2008 and 2009, federal spending jumped by $535 billion, but never does it decline by the same amount.

To look at it another way, in FY 2007 federal spending represented 19.6 percent of Gross Domestic Product (GDP). In FY 2009, federal spending jumped to 25 percent of GDP.  One would expect that over the next 10+ years that the share of federal spending would fall by back to around 20 percent. You’d be wrong.  Federal spending will hit a low of 23 percent of GDP in 2014 and then CLIMB up to 24 percent by 2021.

In contrast, the green line shows federal spending if spending were fixed at pre-recession, FY 2007 levels (19.6 percent of GDP). The gap between the green and red lines represents the permanent increase in spending–some from the stimulus, some from Obamacare some from who-knows-where. The blue shows federal revenue in which I assume that Bush tax cuts will be made permanent (this is to better show that the deficit is due to spending and is not attributable to the Bush tax cuts).

Chart Showing Federal Revenues and Outlays Between FY 2007 and FY 2021

Chart 2 zooms in on just the difference between federal revenue and federal outlays, i.e., the budget deficit. There are a couple of interesting things that pop-out of this chart.

First, even with federal spending held at 19.6 percent of GDP (green line), there still would have been a strong stimulative environment from the federal government due to the revenue drop-off due from the recession and, to a lesser extent, the Bush Tax Cut extension. The spending stimulus package was an add-on (red line) to the natural stimulus that automatically occurs when revenue drops but spending stays the same. So the real question was not whether or not we needed a spending stimulus (we get one anyways), but whether or not we needed additional spending stimulus.

Second, holding federal spending at 19.6 percent would also create an automatic path toward reducing the federal deficit. As shown in Chart 2, by FY 2021, the federal deficit is not only nearly back to zero, but would already be at a sustainable rate (relative to GDP growth) by FY 2014-ish. In contrast, the current projection of federal spending shows that the federal deficit will actually be growing in FY 2021! Overall, between FY 2011 and FY 2021, the current path will create another $11.8 trillion in debt (nearly doubling our current debt load) whereas spending at 19.6 percent of GDP would create only 1/3 of that debt ($3.5 trillion)–again, assuming Bush Tax Cuts are extended.

Chart Showing Federal Budget Deficit Between FY 2007 and FY 2010

So, Nouriel Roubini is flat wrong . . . federal spending is THE problem and only CUTS to federal spending will solve this deficit/debt crisis. Tax increases will only hamper the ability of the economy to recover and worsen our fiscal condition in the long-run. But, wait a minute, this is similar to what was proposed by the Cut, Cap and Balance folks. Although even that plan wasn’t enough since they only cut federal spending down to 19.9 percent of GDP and take until FY 2018 to phase-in to that level. What a bunch of big-spending liberals . . .