More on federal revenues as percent of GDP

A couple of days ago in a post about the debt ceiling debate, I pointed out that federal revenues as a percent of GDP are at their lowest level since 1950.

Check out this interesting graph from this post at Econbrowser:

The numbers are cyclically adjusted, meaning that they are adjusted for normal ups and downs in the business cycle. You can clearly see the structural deficit — we were spending more as a % of GDP than we were bringing in — going from the 1970s into the late 1990s, when we actually ran surpluses for a few years.

Then the trends reversed in the early Bush years because of tax cuts and increased federal spending. There was an early spike in Obama’s term because of the stimulus, and an ongoing decline in revenue with accompanying upward pressure on expenditures because of the weak economy and because of continuing tax cuts. According to the Econbrowser post, federal revenues would return closer to an historical norm by 2016 if the Bush tax cuts expire as currently scheduled. We’d still see pressure on the expenditure side, however; even if “cuts” are made to Medicare and Social Security, we have an aging population so more people will be drawing benefits.

Given that spending for the last 40 years has never been below 18% of GDP, it’s hard to see how that could be the cap, as Republicans have suggested. We’d need about a 25% cut in spending — with an aging population it’s really hard to see how that will happen. And that might still not be enough of a cut to whittle down the debt, since revenues over the last decade have been well below 18%.

In short, Americans have been eating a free lunch for most of the last 40 years, but especially in the past decade.