Wednesday, December 14, 2011

US Treasury Outlays & Receipts

Is Gridlock bullish or bearish? In the past, it’s probably been bullish more than it has been bearish. After all, our constitutional system was designed by our Founders to disperse power among the Executive, Legislative, and Judicial branches of our government. Congress was designed so that special interest groups more often than not would be stymied from achieving their legislative agendas by resistance from “factions” with opposing interests. In Civics, Gridlock is called by the less pejorative name of “Checks and Balances.”

So the system seems to have worked exactly as it was designed (i.e., not to work) this year. According to the Congressional Record, this year through November, the House approved 326 bills, the fewest in at least 10 non-election years; the Senate passed 368 measures, the fewest since 1995. Conversely, the House passed 970 measures in 2009 and 1,127 in 2007, and the Senate for those years approved 478 and 621, respectively.

So far, that hasn’t been very bullish for the stock market. That’s because the legacy of all the lawmaking over the past few years has been to saddle the US economy with huge federal deficits and rapidly mounting federal debt. Various attempts to narrow these deficits have failed miserably. From this perspective, Gridlock is bearish. The outlook is for more of the same next year, and beyond depending on the election results on November 6, 2012.

How did we get to this sorry state? The special interest groups learned that they could achieve their goals through cooperation rather than conflict with one another. Most importantly, they figured out that the government’s budget isn’t a zero sum game if the resulting spending binge is deficit financed. The Constitution needs a Balanced Budget Amendment. European governments seem to be moving in exactly that direction as a result of their fiscal crises.

We monitor the latest developments and trends in the US federal government’s budget in our US Government Finance briefing book. Let’s have a look:

(1) A trillion here, a trillion there. Over the past 12 months through November, the federal deficit was $1.01 trillion. On this basis, it has exceeded $1 trillion since June 2009 (Figure 1). Federal government outlays totaled $3.6 over the past 12 months through November. That’s up 50% since March 2005. Over this period, receipts totaled $2.3 trillion, up 14.8% from the most recent cyclical low during January 2010, but still 11.1% below the previous record high during April 2008 (Figure 2).

(2) Lots more IOUs. Total US government debt outstanding rose to a record $15.1 trillion during November. It is up 50% since September 2008 and 100% since December 2004 (Figure 17). The per capita comparisons are shocking. The government’s debt divided by the labor force, which represents actual and potential taxpayers, rose to a record $9,819 in November, a 100% jump since the spring of 2004 (Figure 23). In October, the government’s debt was 1.6 times greater than a year’s worth of disposable income excluding government transfer payments. That’s a record high, and up from 1.0 during May 2008 (Figure 24).

(3) Tax revenues are up and down. Total federal tax receipts tend to be a lagging indicator of the economy (Figure 12). They rose to a cyclical high of $2.3 trillion over the past 12 months through November, led entirely by individual income tax receipts, which rose to $1.1 trillion (Figure 2 and 9). Corporate tax receipts have flattened at around $200 billion. That’s really puzzling given that corporate profits are at a record high; yet these receipts are about 50% below the record high of $382.3 billion during June 2007. It may be that US corporations are earning more of their profits overseas and aren’t repatriating them because of the high corporate tax rate in the US.

In the past, payroll tax receipts (so-called “social insurance and retirement receipts”) rose during economic expansions, and even during recessions. They’ve been falling since November 2008, when they peaked at $905 billion. They were down to $806 billion over the past 12 months through November (Figure 9). That’s because Washington has been cutting payroll tax rates in an effort to stimulate economic growth.

(4) No more PayGo. The problem with cutting payroll tax rates is that the result is a rapidly widening social welfare deficit in America. Our Social Security and Medicare entitlement systems were designed to be fully financed by payroll taxes, which was the case until the middle of the previous decade. But then the social welfare deficit ballooned to a record high of $402.3 billion over the 12 months through November of this year (Figures 13 and 14).

By the way, a “do-nothing” congressional session, which passes relatively few bills, does not necessarily mean that the power and scale of our government in Washington has been diminished. When Congress cannot approve multiple separate pieces of legislation in a timely fashion, it will often bundle the bills together into the scheme known as an “omnibus” spending bill--which often leads to billions of dollars in pork being wasted on congressional cronyism in one piece of legislation. 

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