Wednesday, June 17, 2015

Gentlemen, start your deficits!

In the recent post, JW Mason writes
Here, first, are the overall and primary budget balances for the federal government since 1960. The primary budget balance is simply the balance excluding interest payments -- that is, current revenue minus . non-interest expenditure. The balances are shown in percent of GDP, with surpluses as positive values and deficits as negative. The vertical black lines are drawn at calendar years 1981 and 1990, marking the last pre-Reagan and first post-Reagan budgets.
The black line shows the familiar story. The federal government ran small budget deficits through the 1960s and 1970s, averaging a bit more than 0.5 percent of GDP. Then during the 1980s the deficits ballooned, to close to 5 percent of GDP during Reagan's eight years ...

Mason doesn't focus on Reagan. I stopped the quote there and it sounds like he does, but he doesn't.

Also, he doesn't buy "the familiar story." But you probably know that.

Here's what I see in Mason's graph... using a technique I got from Jazzbumpa, drawing "trend channel" lines. If there's a proper technique for doing it, I don't know. I'm just connecting low points for one channel line, and connecting high points for the other:

Graph #2
The familiar story describes the deficit trend as a flat, stable trend at "0.5 percent of GDP" in the 1960s and 1970s. I don't see that. I see a well-defined downtrend -- an expansion of deficits -- that begins in the 1960s.

Mason does not seem to dispute the familiar story. He only says a different story is more important. His story is about the red line rather than the black -- the primary balance rather than the overall balance. I won't look at that today.

Today I'm just looking at the black line, the overall balance, and trying to figure out how anyone can claim to see "small budget deficits through the 1960s and 1970s, averaging a bit more than 0.5 percent of GDP." Let me add two more lines to the graph to represent that viewpoint:

Graph #3
This is a much smaller channel. It starts earlier, but it is forced to end sooner -- in the early 1970s -- and it is already pierced in the 1960s by an expanding deficit.

Mason argues that "the increase in federal borrowing during the 1980s was mostly due to higher interest rate, not tax and spending decisions."

I argue that the increase started well before the 1980s.


Jazzbumpa said...

Ooooh - heterodox!

I love it.


P.S. I didn't even think about trend lines. Nice catch.

Then again, I wasn't thinking so much about the total deficit either.

Jazzbumpa said...

BTW - the "rule" (if you want to call it that) for drawing a trend channel is to connect the tops if it is downward sloping, and the bottoms if it is upward. Then drop a parallel along the opposite extreme. I'm astounded how frequently trend channels are well behaved in all sorts of measurable phenomena.

But - I can't see reasonable trend channels in the straight S-D data plotted without the GDP denominator.