Gyroscopic Investing

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http://news.investors.com/ibd-editorial ... htm?p=full

A few years ago I made this graph from the data:



Correlation doesn't equal causation and all that, but it doesn't quite support the narrative, does it?

In any event, focusing on the deficit in isolation isn't a useful endeavor.

People imagine that Obama has run up the deficits of recent years through reckless spending alone without considering the collapse in tax revenue that happens when the economy goes into a deep recession.

The Republicans have also been in control of the House for a couple of years now and they passed every bit of spending that Obama has signed off on.

MediumTex wrote: People imagine that Obama has run up the deficits of recent years through reckless spending alone without considering the collapse in tax revenue that happens when the economy goes into a deep recession.

The Republicans have also been in control of the House for a couple of years now and they passed every bit of spending that Obama has signed off on.

Very true. I also made this graph, which shows party control of congress. Solid blue and red are total Democratic and Republican control, respectively, while purple is divided control:



If you believe that congress can be credit/blamed for revenue levels (iffy IMHO, but lots of people believe this), then it looks a lot like like Republicans were responsible for both the "Clinton surplus" and the "Obama deficits."

It also looks a lot like both parties do nothing to diminish federal spending.

Pointedstick wrote: It also looks a lot like both parties do nothing to diminish federal spending.

To me, that's the key insight that many people seem unfamiliar with.

In particular, I am surprised that the Republicans have been able to point the finger at Democrats about big spending without more people asking questions about why the fiscal situation never seems to change even when a Republican is in the White House and the Republicans are in control of Congress.

It's a bit like a person at an AA meeting criticizing another attendee he happens to dislike for being a drunk.

I think we're confusing correlation with causation (as PS points out might be the case.  There were three expansionary things that were done by government in 2002/2003:

1) Taxes were lowered.

2) Interest rates were lowered.

3) Spending steadily increased.

Now we can argue about the morality of all of these, but they all likely had effects on the economy, and therefore, each other.  I think it's more complex than many give it credit for, but let's just say that lowering interest rates had a natural expansionary effect on the economy, especially in housing.  This will increase the amount of credit out there, as well as spending and incomes, and therefore, it will have a great effect on tax revenues.  Spending, likewise, will actually increase tax revenues as it enters the economy (probably not enough to offset the spending, but it will definitely help increase tax revenue).  So even if rates had stayed the same, the housing and credit boom would have likely resulted in high tax revenues coming out of a recession.

So, yes, any expansionary act that gets people spending money, even on a credit card, or money they got from unemployment, is going to increase tax revenues.  I don't think lower tax rates get any kind of certain "Laffer" credit for increasing tax revenues.

Lastly, if we build in 5% nominal GDP growth (my guesstimate) from 2003-2008 (before our recession had the natural effect of increasing spending and decreasing taxes), and if we factor in the expensive wars and demographic bulge, I don't necessarily see that startling of spending increases... assuming that the federal government should maintain a certain level of GDP-adjusted spending level during normal times, but that recessions, demographic bulges, and wars bring "special circumstances."