TCS Daily

Federal Revenue and the Economy

By Jon N. Hall - July 12, 2010 11:09 AM

Seal of the Office of Management and Budget

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The Office of Management and Budget reports that total federal revenue more than doubled every decade from 1940 to 1980 (Table 1.3, tables). And from 1980 to 2000, total federal revenue almost doubled every decade, going from $517 billion in 1980, to $1.032 trillion in 1990, to $2.025 trillion in 2000. But in 2010, OMB estimates that total revenue will only be an anemic $2.165 trillion. If the current decade had kept pace with the last two decades, the feds would have receipts in 2010 of $4 trillion.

That's more than enough to balance the budget. But the above numbers are in current dollars, not constant dollars (i.e., inflation-adjusted dollars). Table 1.3 also shows that in constant dollars a decidedly different picture emerges: Although federal revenue from 1950 to 2000 had always grown by the end of every decade, it never doubled. And OMB estimates that in constant dollars federal revenue will drop from $2.310 trillion in 2000 to $1.929 trillion in 2010 -- an inflation-adjusted drop of $381 billion.

So if OMB's estimate for 2010 holds, the Aughts will be the only decade in the last 70 years when the feds suffered a decrease in revenue in real money.

The Nineties ended with a bang. The year 2000 was the height of the dot-com bubble. Revenue gushed into the federal treasury. The feds posted their largest budget surplus ever: $236 billion. (Republican Congress, anyone?) When the dot-com bubble popped, it ended the longest economic expansion in modern American history. But the ensuing recession didn't start until the next decade, the first quarter of 2001.

The Aughts, however, are ending with a whimper. But the current decade had its own bubble: the housing bubble. And with the housing bubble, total federal revenue went up smartly, posting an all-time high in 2007 of $2.568 trillion. But unlike the dot-com bubble of the Nineties, the housing bubble of the Aughts didn't conveniently pop in the last year of the decade to leave the downside to the next decade. Instead, the housing bubble popped more than three years before the end of the decade: December 2007. Timing, as they say, is everything.

But timing can't begin to account for the magnitude of the shortfall in federal revenue. Neither can the role of uncollected taxes, nor the forgone revenue from having taken millions of working-class folks off income tax rolls, nor the old progressive standby of "tax cuts for the wealthy" fully explain the shortfall. What can?

The broadest measure of the economy is gross domestic product. OMB's Table 10.1 shows that GDP grew more slowly during the Aughts than in any other decade over the last 70 years. In each successive year from 1940 through 2008, GDP grew. Even during recessions, even during stagflation, even in the wake of the 9-11 terrorist attacks on the very heart of America's financial district, GDP always grew. Such was the underlying strength and resilience of the American economy.

But in 2009, GDP contracted, and by some $201 billion -- the only contraction of GDP in the last 70 years.

The shortfall in federal revenue isn't that the feds can't suck enough money out of the economy due to low tax rates; the problem is the economy itself. The economy is ailing. And it's not a cyclical disease; it's chronic, structural. The current problems with the economy have been festering for decades and have finally come to a head.

Evidence that the economy has taken a turn for the worse can be seen in the response to the ever-increasing doses of stimulus. The patient lies comatose on its gurney, we apply the electrodes, turn on the juice, and still it just lies there unresponsive. By contrast, after the 9-11 attacks (which occurred during a recession) GDP started expanding again the very next quarter. But now we seem headed for a double-dip in the recession, and experts say it will take years for employment to return to pre-recession levels. There's even talk of a lost decade ahead, such as Japan suffered in the Nineties.

We mustn't delude ourselves that we can go back to the halcyon days of healthy federal revenue by merely hiking tax rates. We must be correct in our diagnosis before we can write a prescription. The cause of our economy's sickness is government.


OMB's Table 1.2 shows that total federal outlays were equal to 18.2 percent of GDP in 2000. In 2010, outlays are estimated to hit 25.4 percent of GDP, higher than in any other year since 1945. Such spending is a drag on the private sector. As government grows, the real economy atrophies. And yet, the feds have plans for even more spending. The public-sector parasite is killing its private-sector host.

Whereas the dot-com bubble was a private-sector bubble, driven by animal spirits and mania, the housing bubble was a creature of government. After the 9-11 terrorist attacks the Federal Reserve (rightly) slashed interest rates to keep the economy afloat. But rates were kept too low too long. The resulting "free money," along with a government policy to push home ownership, created the housing bubble. We're still working our way through the mess even as the next (and perhaps final) bubble inflates before us: the government bubble. This will prove the most intractable bubble of all. We have only to look at Europe, particularly Greece, to see what's coming.

With mountains of mandates, regulations, red tape, and the second highest corporate income tax rate on the planet, government has heaped too many burdens on business. The economy has buckled and fallen to one knee, and while it struggles for air, yet more burdens are placed on its back: the retirement of baby boomers and ObamaCare.

Government must slash its spending and radically downsize itself. Only then will the economy stabilize and heal. And only with a vibrant healthy private sector will government revenue return to normal.

This article first appeared on the American Thinker.

Jon N. Hall is a programmer/analyst from Kansas City.


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