- The Washington Times - Sunday, February 1, 2009

ANALYSIS/OPINION:

ANALYSIS/OPINION:

COMMENTARY:

With the Congressional Budget Office projecting a federal deficit of $1.2 trillion for 2009, now is a good time to look backward at past recessions’ effects. For those worried about increasing the federal deficit during a recession, have no fear - deficits and recessions go hand in hand.

Slowing revenues and rising spending have been the historical hallmarks of recession over the last 60 years. Not only are these same factors again in place, they are compounded this time by new ones unique to this recession and our current period.

In the last 60 years, America has had nine recessions in addition to the current one. In looking at the federal budget in the year in which a recession’s trough occurred, only in 1954 did the deficit not increase. And the 1954 exception actually proves, rather than refutes, the rule because it was the year following the Korean War, when two-thirds of its deficit decline was due to reduced defense spending.

During these recessions, the federal budget deficit did not just increase, it skyrocketed. In five, it increased more than 100 percent. Its biggest percentage jump was an incredible 768 percent increase during 1975 when the deficit rose from $6.1 billion to $53.2 billion. While those dollar figures may seem quaintly small by today’s standards, the 1975 deficit constituted 3.4 percent of gross domestic product (GDP) - higher than 2008’s $455 billion, which was 3.2 percent of the economy.

The average deficit increase for these 10 recessions is 209 percent. Even factoring out the more volatile first 30-year period, the last five recessions from 1980 onward have seen average deficit increases of 78 percent.

Such precedents make a trillion-dollar deficit today well within the realm of possibility. If the current recession increases 2008’s federal budget deficit by the same percentages, it would jump anywhere from $812 billion to $1.404 trillion in 2009. And the dynamics that have driven deficits during past recessions, are playing out again during the first two months of the current federal fiscal year.

First, recessions slow revenue growth. In fact, in four of the last 10 recessions, revenues have fallen - including in 2001 and 2008, the two most recent. Over the last 10 recessions, federal revenues have grown an average of just 1.7 percent. During the first two months of this fiscal year (which began Oct. 1), the Congressional Budget Office estimates that income tax receipts are down 9 percent, corporate tax revenues down 86 percent, and overall federal revenues are down 6 percent from 2008’s.

Second, recessions send federal spending soaring. Again with the exception of 1954 and its declining defense spending, federal outlays increased in every other recession. Federal spending has increased an average of 10.7 percent over the last 60 years. Federal spending during the first two months of the current fiscal year is surpassing this average. Overall spending has increased 13.2 percent, with what CBO labels spending for “other activities” - including “payments for deposit insurance, unemployment benefits, and food and nutrition services” - growing by 29 percent.

The payments for deposit insurance reveal this recession’s unique wrinkle: the financial sector’s crisis. Another factor making the current recession different from most of its nine predecessors is the role of entitlement spending. These auto-pilot programs of the federal budget, by which federal spending is automatically triggered, did not exist in the first four recessions of the last 60 years. Now fully implemented, entitlement spending grows as more people qualify for benefits during the economic downturn.

Another unusual aspect of the current recession is its occurrence during wartime. Only two other recessions of the last 60 years have overlapped with wartime spending - 1970 and 2001 (and the latter’s war expenditures were still relatively small at the time). Now recession-accelerated spending comes on top of already heightened wartime expenditures.

History has been unkind to federal budgets during recessions. The factors that drove these deficits are already in place for 2009. Added to them are this recession’s unique financial-sector crisis and the spending accelerators of large entitlement and wartime spending. As a result, America may have no choice but to confront an unprecedented financial event and a fiscal one as well.

J.T. Young served in the Treasury Department and the Office of Management and Budget 2001-04 and as a congressional staff member 1987-2000).


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