Why the US Debt Limit Agreement is Only a Temporary Solution

Most people assume that the mismatch between US federal government revenue and expenses will go away, with enough time. All that is needed is a little “patch” now, and some more time, in order for the mismatch to disappear.

I don’t think the mismatch can be made to go away, partly because the mismatch between government revenue and expense is far worse than most realize. Furthermore, high oil prices seem to lead to recession, making it more difficult to fix the gap between government revenue and expenses.

There is good reason to believe that oil production will not increase materially in the next few years. With oil demand from China and India continuing to increase, the mismatch between oil supply and demand can be expected to get worse with time, leading to more recession, and a greater gap between US federal government revenue and expenses.

Because of these issues, about all recent debt limit agreement can be expected to do is push the problem down the road for a few more months. Eventually, we will be back into recession, and the revenue /disbursements mismatch will be worse than it was the last time around.

Mismatch between Government Revenue and Expenditures is Very Large

The way I look at federal spending is to look federal government revenue and expense on a combined basis (including budgeted programs, off-budget spending, and Social Security) using historical data from the Congressional Budget Office (CBO). Instead of comparing amounts to GDP, I compare amounts to non-governmental wages (Private Industry Wages + Proprietors Income) from the Bureau of Economic Analysis, since I believe this gives a more stable base, and since, as a practical matter, most taxes are on wages.

When we look at Federal Government expenditures and revenue in that way, what we see is as follows:

Figure 1. Federal Government revenues and expenditures on a cash basis, compared to non-governmental wages, based on BEA and CBO data.

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