US deficit not a record-its small in fact

July 29, 2008 1:51 pm

Dean Baker, an economist and excellent post-Keynesian who writes for the American Prospect has beat me to the punch by pointing out yesterday what I have pointed out many times despite all the media propaganda and hype in prominent places like the New York Times, the Federal deficit in the US is nowhere near any sort of record .
In fact by historic standards its actually quite small.

The correct way to measure the size of the deficit is to take it as a proportion or percentage of the GDP. Its nominal size is essentially meaningless as Baker states.

In 2009 it is projected to reach 490 billion dollars or 3.3 % of the GDP.

In 1945 it was 22 % of the GDP.

During the Second World War it ranged from 14.8 % in 1942, 30.8 % in 1943, 23.3 % in 1944.

In 1946 it was 7.6 %. It then reverted to a a surplus of 1.2 % in 1947. In 1983 it was 6.0 %.In 2002 it was 3.1 % of the GDP. (all figures are for the on budget calculation.Off budget receipts usually exceed off budget outlays thereby reducing the total deficit or enhancing the surplus in most years)

(source:Historical Tables Budget of the US Government Fiscal Year 2008, Table 1.2 Summary of Receipts, Outlays and Surpluses or deficit as percentage of the GDP 1930-2012, p.23-24. See also Survey of Current Business, 1984 and   Economic Report of the President, Feb. 1985 Table B 25 p.262 cited in Robert Eisner, Tables 5.2,5.3 & 8.1How Real is the Federal Deficit,pp.44-45& pp.79-80.)

So measured as a percentage of the GDP from 1929 to the present a deficit of 3.3 % is rather small and certainly nowhere near a record. There are at least twenty other   years where the deficit was much bigger.

In fact, its small size which includes the impact of the stimulus package of 168 billion is probably the reason the recovery will be more sluggish than would have been the case if the Bush administration had opted for a more substantial robust stimulus of two or three times the size.

But , of course, had they done so they would have faced a barrage of foolish ill informed criticism from the journalists and many Democratic party politicians and influential backers.

It really is about time that all of these people went back to school on matters of public finance. A good place to start is the US Government   publication, Historical tables for fiscal year 2008 published by the Office of Management and Budget and Robert Eisner's classic work, How Real is the Federal Deficit.

In the meantime good for Dean Baker. Its nice to have some company.