Why did rich-world deficits start exploding around 1980? asks Noah Smith.
You already know my answer: They didn't. Now I can read his post, and reply.
The U.S. federal deficit, which had been decreasing since the end of WW2, began to trend upward beginning around 1980
Then he shows a picture of the U.S. Federal debt (not the deficit) ...
|Graph #1: Noah's Measure of the Federal Deficit|
He immediately explains (in a very short paragraph) that "the proximate cause was big tax cuts". But he wants to talk about the political-economic cause. "I have a theory" he says.
Yeah, Noah, I bet you do.
But I didn't get any farther than that, reading his post. I had to stop reading and start responding. So I don't yet know what his theory might be. Before we look at Noah's theory...
Before we look at Noah's explanation of something that didn't really happen -- his explanation of why it happened, I mean -- let's pause long enough to see whether it really happened, or not.
1. Stock and Flow
Debt is a stock. Deficits are a flow. A deficit is the addition to debt during a well-defined short period of time. A debt is the sum total of deficits accumulated over a continuous series of those time periods. So obviously, since "debt" takes a whole bunch of "deficits" and adds them all together, a "debt" is going to be a lot bigger than a "deficit". Look at it on a graph and, if you're a little naive, you might even think the debt is "exploding".
Here is the FRED graph Noah used. It goes all the way back to 1966. Whoop dee doo.
For the next graph, I took Noah's graph and added a line for the U.S. Federal deficits, the flow number. Mine (red) is shown as a percent of GDP, just like Noah's (blue).
|Graph #2: U.S. Federal Debt (blue) and Deficit (red). The blue line is the same as on Graph #1|
(Click the graph to see the FRED source page.)
When numbers "explode" on a graph, you expect to see a line going up, fast. That's what I expect. That's what Noah was showing us with his Federal debt graph: After the early 1980s, the line goes up sharply. Too bad his graph doesn't show deficits.
A deficit is a shortage, of course. If a deficit is a hole in the ground, then a bigger deficit is a bigger hole. As deficits get bigger, the line on a graph goes down. I don't know why FRED shows it that way, but they do. That's why the red line is almost all below zero on Graph #2.
It's not intuitive. But that's okay. If deficits were "exploding" we'd see the red line go down a lot. Myself, I don't see that on Graph #2.
I know what would help. We can get rid of the blue line and just look at the red line. We can give all the space to the red line and let it expand to use the available space. (FRED will expand it automatically when I remove the blue line.) Then maybe the little wiggles will look like explosions.
But if I'm gonna do that, I'm also gonna put a minus sign in front of the data series, to invert the line. That way, bigger deficits will go up on the graph, instead of down. It'll just make more sense.
2. Go with the Flow.
Here are the deficits that Noah didn't show us:
|Graph #3: U.S Federal Deficits as Percent of GDP (inverted, so higher is bigger)|
Yes, it's satisfying to see some action in the line on the graph. But you have to remember it's the same red line on graph #3 and on Graph #2. We're just taking a closer look.
So do we see "explosions" on Graph #3? Remember, Noah says deficits started exploding around 1980. Do you see that in the U.S. data? I don't.
I see the growth of deficits peaking around 1980 -- in 1983 actually -- and going downhill after that until the year 2000. And then maybe, an explosion after the year 2000. Here, I eyeballed in some trend lines:
|Graph #4: U.S Federal Deficits as Percent of GDP (with some trend lines just by eye)|
Hey if you look at the bottom part of Graph #4, above, just below the dates there's a squeezed-down version of the graph that shows how much of the data we're looking at. We're only looking at half, a little more than half of it. That's because Noah was looking at a data series that starts in 1966, and I didn't change the dates yet. I'll do that now. But first, look at that squeezed down version again. Look at the left-hand part, the years before 1966. You can see a big hump there. Probably everybody knows that hump is from World War Two. Yeah, let's look at that.
|Graph #5: U.S Federal Deficits as Percent of GDP, all years. Inverted so big is up.|
Okay, deficits were increasing since the 1970s -- or since the 1950s, really -- and deficits remained relatively high for an extended period, from the mid-1970s to the mid-1990s. And a bunch of high deficits one after the other should make the debt graph show an explosion. Sure.
And yes, Noah's graph shows a sudden, sharp, and persistent increase in debt from the early 1980s to the mid 1990s. But that is not an explosion of deficits. If you insist on calling it an explosion, it is an explosion of debt. Deficits tended to get smaller after the early 1980s, as a percent of GDP (and that's Noah's yardstick).
3. A Discrepancy
Well, Noah says the explosion started "around 1980". And you can see it in his graph. Checking his graph at FRED, it appears that the increase in debt started after 1981 Q3. The increase in debt as a percent of GDP.
|Graph #6: Noah's graph of the U.S. Federal Debt, again|
Why, from 1976 to 1981, does Noah's graph trend downhill? Why doesn't it show increase since 1970? Hey, I wouldn't be asking the question if I didn't think I knew the answer: Inflation skews the numbers.
To be continued...