Fiscal Federalism 14: Federal Expenditures by State

Today the U.S. Census Bureau released the latest Consolidated Federal Funds Reports (CFFR) for Fiscal Year 2010. The CFFR is the most comprehensive analysis of federal spending by state available. A few weeks ago I blogged on Federal Aid to the States which is one of many components included in the CFFR.

Overall, the major moocher states off of Uncle Sam include Massachusetts, Connecticut, Virginia, Maryland, Kentucky, North Dakota and New Mexico with per capita federal spending topping over $12,000. On the flip side, the states that receive the least (ranging from $0 to $8,999 per person) from Uncle Sam include New Hampshire (Yes!), Texas (Gov. Perry anyone?), Illinois, Minnesota, Utah, Nevada, Oregon and California.

Check out the map below to see where your state falls on the moocher scale . . .

Chart Showing Per Capita Federal Expenditures by State for Fiscal Year 2010

Cut Federal Spending, Don’t Raise Taxes

Creative Commons License photo credit: SOGKnives

In my previous blog blasting Nouriel Roubini for suggesting that Uncle Sam should raise taxes to close the budget deficit, I made this statement: “Tax increases will only hamper the ability of the economy to recover and worsen our fiscal condition in the long-run.”  Of course, you don’t have to take my word for it . . . so I thought I would review some pieces in the academic literature (at the international, national and state-level) that make the same arguments.

First, Harvard economists Alberto Alesina and Silvia Ardagna examine the economic effects of fiscal policy (pdf) in countries the constitute the Organization for Economic Cooperation and Development (OECD) from 1970 to 2007.  They find that:

“As for fiscal adjustments those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases.  In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”

Second, UC Berkely economists David Romer and Christina Romer (former Chair of the Council of Economic Advisors to President Obama), examine the economic effects of U.S. fiscal policy (pdf) since 1947.  The find that:

“The resulting estimates indicate that tax increases are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.  The large effect stems in considerable part from a powerful negative effect of tax increases on investment.”

Finally, economists Stephen Brown, Kathy Hayes and Lori Taylor examine the economic effects of fiscal policy of the U.S. states (pdf).  They find that:

“If anything, most public services do not appear to justify the taxes needed to finance them . . . this finding would seem to imply that other state and local public capital has been increased to the point of negative returns, perhaps because a growing stock of other public capital is indicative of an increasingly intrusive government.”

You decide . . .

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 . . .

The Real Federal Debt

Creative Commons License photo credit: TimothyJ

I’m so sick of this debt ceiling debate because it is all a ruse.  The federal debt, as defined by the debt sold by the U.S. Treasury, is only a small fraction of all the obligations that the federal government owes.  Thankfully, I just found this nifty debt clock (in the sidebar) from the good folks at the Institute for Truth in Accounting.  Here is how they derive their higher estimate:

The Institute’s Debt Clock is an estimate of the nation’s publicly-held federal debt, intergovernmental debt held by the various branches of the government, the unfunded obligations related to social insurance programs as well as the pensions and retirement benefits promised to military veterans and government workers.The debt represented by notes, bonds and bills are known to the penny and can be seen here.

Estimates of the unfunded portion of America’s obligations are not so precise.Unfunded obligations include Social Security, Medicare, pensions, etc, and the components of the estimate come from several agencies, the most important of which are from the Social Security Administration’s trustees.

Typically, the trustees make their actuarial estimate and release it on April 1st, each year.This figure represents the trustees’ best estimate of the demographic factors that will affect the receipts and payments that the system will pay for old age and medical benefits for the many Americans receiving benefits. This year, the trustees have deferred issuing their estimate because they want to have more time to calculate the effect of the new health care law.Their estimate must cover the next 75 years rather than the 10 years of taxes and the six years of benefits the Congress used to estimate reform’s costs.We expect that their estimate will be released  in June, at which time we will reset the Institute’s Debt Clock.

Click here for a more detailed explanation.

Watch it and weep . . .