14 February 2020


By Raul Elizalde

This article also appeared on forbes.com

Sen. Rob Portman (R-OH) appeared on a financial TV show on February 12 to answer questions about the budget recently proposed by the White House. The budget asks to make permanent tax cuts that are supposed to expire in 2025. This, one would think, would drive the federal budget deeper into deficits that have already grown to the tune of $1TN, but he pushed aside that idea. According to him, the deficit is widening because expenditures are too large. This is his actual quote:

“It’s not about revenues, they are actually increasing up and above the historic average as a percentage of GDP. It’s about the spending.”

Sen. Portman sits on the Senate Finance Committee and is a former director of the Office of Management and Budget (OMB), which administers the federal budget. As such, it is hard to believe that he could make a statement that is in such blinding contradiction to the facts. In the last two years, federal revenues plummeted as a percentage of GDP:

source: Federal Reserve Bank of San Francisco

An important factor behind this decline was the collapse in corporate tax revenue after the 2017 tax cut bill, which pushed it down to levels not seen since the Great Depression of the 1930s:

source: Federal Reserve Bank of San Francisco

Senator Portman is not the only one that, intentionally or not, gives incorrect numbers.

Jake Novak, a “former senior editorial columnist” for CNBC.com states: “the numbers don’t lie. Federal tax revenue soared to a record $806.5 billion in the first three months of fiscal 2020. That continues the trend of record tax revenues that have been coming into the Treasury over much of the last two years. “

He even included the link to the U.S. Treasury department’s release. Alas, the release not only shows that the $806.5BN was not a record (just the prior quarter was $853.3BN) but also that those are not tax revenues but U.S. Treasury receipts. These include payments into Social Security (“Social Insurance and Retirement”) of $290BN, and various other items like court fines, licenses, and deposits of earnings by the Federal Reserve. The “record” number isn’t even seasonally adjusted, and as such it varies a lot from quarter to quarter (2Q19 was far larger at $1.1TN).

Some charitable explanations for Mr. Novak’s obfuscation are that he does not know the difference between receipts and tax revenue, or that he failed to look at the more meaningful percentage of GDP, or that he was only pointing out that non-adjusted number was a fourth-quarter record. A less charitable explanation would be that, like Sen. Portman, he’s using numbers incorrectly in order to fit a narrative. (For the record, here is the seasonally-adjusted information one should use).

Is spending out of control? As a percentage of GDP, spending indeed started rising in 2017 to its highest level since 2013, but it has remained largely within a narrow range for more than six years. The revenue fall was far more important in creating in the $675BN in additional red ink that the U.S. has seen cumulatively since 2016.

source: Path Financial LLC

So does the deficit matter? Oddly, opposite ideological extremes don’t seem too think so.

Both Modern Monetary Theory (a fringy economic theory supported by leftist thinkers) and dyed-in-the-wool supply-side economists (who support the against-all-the-evidence conservative idea that tax cuts pay for themselves) appear to be fine with ever-increasing deficits. Reasons differ: The former see deficits as a long-term way to distribute wealth more broadly (dangerously downplaying the role of productivity in creating wealth), while the latter see tax-cut-driven deficits as a short-term price to pay to raise productivity (it virtually never turns out that way).

To be sure, there is truth in the idea that a country whose debt is denominated in a currency it can print can run deficits that other countries cannot: Owning the printing press guarantees that there will always be money available to repay debt. After all, the U.S. has run deficits for 60 years (with a brief interlude between 1998 and 2001) and it still reigns as an economic superpower, so maybe deficits really don’t matter.

Such statement was widely rejected until recently. According to mainstream economics, large deficits and exploding debt eventually push inflation through the roof, make interest payments unsustainable, and end up requiring draconian belt-tightening measures to steady the ship.

But things have not turned out that way: Inflation is below the Fed’s target, interest rates are at historic lows, interest payments on the debt are as low as a percentage of GDP as they were in the 1960s and the U.S. has never failed to find buyers for new debt.

source: Path Financial LLC

One reason why Senator Portman may have made up numbers may be because, as a fiscal hawk, he seeks narratives consistent with his long push for a balanced budget amendment focused on spending cuts. Who knows why others’ numbers are also sloppy.

But they needn’t bother to fuzzy the math. As long as rates hover along history’s bottom and the U.S. finds buyers for its bonds, federal deficits and debt won’t matter much - at least until rates start going up in earnest. Then we will have to clean up our finances really fast, and it won’t be pretty.

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