Friday, November 8, 2013

Inflation-adjusting deficits

It's easy to inflation-adjust deficits, as opposed to debt. A deficit is annual: This year's deficit doesn't include any of last year's deficit, or any other year. So adjusting deficits is like adjusting GDP: Multiply by 100 and divide by the price index. That's it.

Here's the record of Federal government deficits:

Graph #1: The Bigger the Deficit, the Farther Down the Line Goes

The line goes down more as the deficits get bigger, because they're deficits. I find it confusing, though. Just casually looking at it, I want the bigger deficit to be higher. So I inverted the graph. Also, I'm chopping off the years before 1940 because I'll be using another time series doesn't go so far back in time.

Graph #2: The Bigger the Deficit, the Higher Up the Line Goes

As noted above, to strip away the inflation from these numbers, I just have to multiply by 100 and divide by the price index:

Graph #3: Graph #2 Corrected for Inflation

Corrected for inflation, the Federal deficits start increasing in the late 1960s, and trend upward all through the 1970s. The trend runs flat through the 1980s, then falls in the 1990s.

The increasing size of deficits means a faster-growing debt. This confirms what we saw the other day, that a correctly inflation-adjusted Federal debt does not run flat from World War Two to the Reagan years.


Jazzbumpa said...

It's not flat even if you don't inflation adjust.

I'm really confused as to what you are trying to accomplish. Could you explain it in words of one syllable so my little pea brain can follow?


The Arthurian said...

0. By my graph #3, the deficits increased in size from start-of-data to start-of-Great-Inflation. Then they increased rapidly in size during the Great Inflation (and this is true even though I "corrected" the deficit numbers for inflation). After about 1983, the (inflation-adjusted) deficits no longer increase in size, until around the year 2000.

1. I'm trying to say that the above paragraph, paragraph zero, is an accurate description of our deficits corrected for inflation.

2. Next (if we can ever get to it!) I want to point out that paragraph zero completely contradicts the picture of inflation-adjusted debt as shown in the first graph of my dead cat post, the "slay the dragon" graph.

My paragraph zero above also completely contradicts the "slay the dragon" statement that "the deficit exploded under Reagan."

Now, where do we stand?

Jazzbumpa said...

Per your Graph 3, under Reagan, your metric went from 150,000 to 400,000. It stayed above 240,000 for his entire term. After 1992, it started to go down. It passed through 240,000 in 1995, on the way to a brief Clinton surplus.

Pre-Reagan, it NEVER went above 240,000.

Yes, deficits had been on the increase since that data series began, but debt absolutely exploded under Reagan/Bush I and dropped like a rock under Clinton.

I'm not saying any of this was good, bad or indifferent. Those are simply the facts.

I cut through it other ways in comments to your previous post, and every slice confirms that deficits exploded under Reagan.

Why do you need to deny this?

So -

1) Your para 0 is an accurate description. So is what I am saying in this comment. After 1983 deficits no longer increase. They just meander for a decade in never-seen-before territory.

2) OK, but why bother? I still don't see the point, or understand what is fueling this whole exercise.

But, alas, your para 0 does not contradict the statement that debt exploded under Reagan.

Here are averages by presidential term for your Graph 3 data set.

Ike 14196
JFK - LBJ 38688
RMN-GF 82161
Carter 144007
Reagan 297632
Bush I 342074
Clinton 60002
Bush II 270720

I could maybe see your argument if Clinton never happened. Until 1993, it looked like a continuous sweep up. But '92-2000 shows that not to have been the case. Deficits exploded again under Bush II, but even his average is less than RWR's.

Debt exploded under Reagan. He spent like a drunken sailor, and lowered taxes. It was inevitable.


The Arthurian said...

"But, alas, your para 0 does not contradict the statement that debt exploded under Reagan."

Alas, I don't know what you think the words "debt exploded" mean. To my knowledge, "exploded" is not a technical term in economics.

I think we conflict on meaning and, since we have not defined the word, the conversation cannot progress.

My focus is the *increase* in the size of deficits. Your focus seems to be the *level* they get to, by having increased. For example: "After 1983 deficits no longer increase. They just meander for a decade in never-seen-before territory." And it is this meandering at the high level that disturbs you.

But deficits cannot be at a high level unless first they increase!

It looks to me like inflation-adjusted deficits increased to the early 1980s, then decreased to the Clinton-Bush transition. Reagan had the benefit (if that is the proper term) of having high deficits while President, but the increase that he halted was mostly the work of his predecessors. Reagan halted the increase and turned it to decrease.

The Arthurian said...


"... debt absolutely exploded under Reagan/Bush I and dropped like a rock under Clinton."

I think you should be reluctant to point out the Clinton success in deficit reduction. I think there's a good argument that his "success" is what brought on the financial crisis.

Jazzbumpa said...

Last things first - note that I specifically disclaimed a value judgment. We're only talking about debt levels and rates of change, not good vs bad nor cause and effect.

For your graph 3 metric, the previous high of 1976 [a single high point followed by a steep drop] is exceeded continuously starting in 1982 for 14 years.

Look at rate of change for your Graph 3 metric. I took 5, 8, and 13 year averages of the base data, then YoY change for each average.

In each case, in 1982 or 3, an all-time high is reached. In 1987 rate of change drops sharply, because the metric has leveled.

On a rate of change graph for these averages, the 81-88 years are clearly different from what came before and immediately after, due to the high values and steep slopes both in and out.

Also the 4 to 5 year long quasi-plateau ca 82-6 is unique in the data set.

That's what I mean by debt exploding - steep climb into new high territory, and staying there for an extended period, clearly different from what precedes and follows. In this way, the Reagan-Bush I years are
unique in the post WW II part of the 20th century.

Then things go completely crazy in this century, but that's quite a different story.