Friday, November 23, 2012

Thornton: "the U.S. deficit/debt problem began during the early 1970s when the government started to increase spending significantly without a corresponding increase in tax revenue"

I showed this graph in the early post yesterday as Graph #4:

Graph #1: Federal revenues (red) lag GDP (green) more than Federal spending (blue) leads GDP.
I called it a "conceptual view" because it's not really a comparison of the Federal numbers to the GDP. GDP is by itself on the right-hand scale. So I got up in the middle of the night to redo the graph. I want to compare the Federal numbers to 20% of GDP:

Graph #2: All on the Left Scale, and Not on a Log Scale
Click Graph for FRED source page

Before 1970 the three lines run tight together. After 1970 Federal revenue (the red line) drops down a bit from the others; and after 1974 it drops down more. Federal spending (the blue line) runs tight beside GDP÷5 until the recession-induced blip of 1975, and tight again until 1980.

It does appear that the government "started to increase spending significantly" faster than the trend of GDP -- but not until 1980 and after. Not "during the early 1970s" as Daniel Thornton says. Definitely not "around 1970".

For proper analysis of the problem, it makes a world of difference.


Clonal said...

I don't see THornton's view in the graphs at all. You could use W019RCQ027SBEA/FGRECPT to see what I am talking about The graph is at

You should also realize the US closed the "gold window" on Aug 15th 1971.

The Arthurian said...

Clonal, you're the second guy in two days to relate the gold window thing to this topic. I don't understand what the relation is. And I definitely don't see any change in the graphs that appears to be related to that 1971 event.

Funny, I read your post & looked at your graph and tried to think of ways to look at the numbers, and I went right back to "relative to GDP" -- the same relation Daniel Thornton uses, which I claim is unsatisfactory because of changes in the GDP trend.

This is what I want to get at, "correcting" for the slowdown in the GDP trend, and looking at Federal spending and other numbers, relative to these corrected GDP values.

Know anything about 3D graphs?

Clonal said...


When you compare it to GDP you get Which is more along what Thornton is alluding to.

However, the rise and fall of government spending bears a close correlation to the price of oil (see )

As the price of oil rose, the government would have had to increase its spending to get enough money into the economy to be able to use that oil. This process required the US to close the gold window, and use floating currency exchange rates. if you notice, on the graph, oil prices started increasing in 1970. US crude oil production peaked in 1970 ( )

The Arthurian said...

Well that Hubbert Curve graph is disturbing.

"As the price of oil rose, the government would have had to increase its spending to get enough money into the economy to be able to use that oil."

Oh I definitely agree with that. But I use the argument in a different way. I leave out "oil" and generalize as "rising costs" without regard to the source of the cost pressure. This is my argument that "cost push inflation" is not solved by Volcker-style monetary restriction.

Steve Keen writes: "inflation took off well before OPEC’s price hike."

I accept Keen's view, and I see BOTH the oil price hikes and "closing the gold window" as responses to excessive creditmoney creation in the 1960s.

I think problems in the money are universally mistaken for problems in real factors such as oil. But even if there are real problems with real factors (which I do not deny may exist today) the problems in the money make the real problems unsolvable.