Origins of the deficit

Date posted: August 18, 2011

The federal deficit as a percent of the economy was 1.1 percent just a few years ago. In 2009, it increased to 10.1 percent of the economy. What happened? N.C. State University economist Mike Walden explains.

“And of course this is the basis for all the discussion and disagreement about what to do about the deficit. And to again remind our listeners, the deficit is the annual increase in the national debt, and the national debt is the accumulation of all past deficits that have not been repaid.

“Well, I think the thing that happened was the worst recession since the 1930s. Typically, during recessions we see federal revenues go down as a percent of the economy. Yet we see federal spending go up. And we saw that exact pattern during this recent recession.

“For example, going into the recession, federal revenues as a percent of the economy were 18.5 percent. By 2009 they had dropped to under 15 percent. And on the other hand, federal spending due to the fact that there are programs that help people, food stamps, Medicaid, et cetera, that spending is going to go up during recessions.

“Also, we’ve had programs that try to jump start the economy — the TARP program, the stimulus program. You typically do see federal spending as a percent of the economy go up. It went from about 20 percent of the economy prior to the recession to 25 percent of the economy in 2009.

“So, this is really the origin of the increase of the deficit. Now many economists think the relative size of the deficit will actually go down, as we hopefully grow ourselves out of the recession. But we look to see those deficits still remain uncomfortably high. That’s, again, the reason for all of the plans and disagreements over those plans that we’re seeing in Washington.”

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