As Washington Thrives, the U.S. Economy Sputters

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America is midway into its largest and longest federal revenue increase in history. This in turn is being applied to a relatively weak economy. It is increasingly difficult to avoid asking whether there is a cause-and-effect relationship between these persistently increasing revenues and the stubbornly lagging economy.

Federal revenues have increased for three consecutive years - not simply in absolute terms, but relative to the economy. According to the Office of Management and Budget's Historical Tables, which compile budget data back to 1930, such a three-year increase has only happened three previous times: 1950-52, 1979-81, and 1994-96. After growing by a combined 0.6% of GDP in 2011 and 2012, last year's - fueled by income and payroll tax rate hikes - leaped a dramatic 1.5%, making it the largest increase in terms of GDP since 1969.

Despite fiscal year 2013's dramatic spike, 2014's are projected to grow too. According to the Congressional Budget Office, this year's revenues are predicted to rise another $257 billion - a 9.3% jump - and increase another 0.9% of GDP. Midway through this fiscal year, revenues are already ahead of pace.

According to CBO, federal revenues will still not be done growing relative to the economy. In 2015, they are projected to grow another 0.6% of GDP and increase by another $251 billion, or 7.1% above 2014's.

If these estimates hold, federal revenues will have increased relative to the economy for five consecutive years. Next year's revenues would exceed 2010's by an incredible $2.305 trillion, or 52.8%. Overall, revenues will have increased by 3.6% of GDP in this short span. Only once before, 1994-98, has America ever seen federal revenues annually increase relative to the economy for five consecutive years.

Of course, some will dispute that the current five-year revenue run-up is noteworthy. First, they will point out that for six years the recession drove revenues well below their 40-year average of 17.4% of GDP. That is true, but federal revenues will easily surpass that average this year. And according to CBO, they will also stay there - never dropping below 17.6% of GDP, while averaging 18.1% over the next decade.

Second, they will say that 1994-98 saw federal revenues at an even higher level of GDP - averaging 18.3% - yet the economy grew far more robustly than today's. Again, that is true, but therein also lies the point: Today's weaker economy is being asked to sustain a far larger revenue increase than did the former stronger economy.

From 1994 through 1998, the U.S. economy averaged real annual growth of 3.88%. In comparison, real GDP growth over the last three years has averaged just 2.17%. The 1994-98 period's lowest rate of real economic growth (2.7% in 1995) is barely below the highest real rate of growth (2.8% in 2012) of the last three years.

Just as 1994-98 had substantially higher real economic growth, it also sustained a far lower federal revenue increase relative to that growth -a 2.2% increase of GDP. Today's significantly lower economic growth has already absorbed just short of that amount - a 2.1% increase over the last three years - and is projected to face a further 1.5% increase over the next two.

One item those wishing to explain why increasing revenues are not the economy's problem will assuredly not cite as reason for the dramatically different economic performances is the impact of federal spending. Federal outlays fell from 20.7% of GDP in 1993, to 18.5% of GDP in 1998. Since 2010, when they were 23.4% of GDP, federal outlays are projected to fall no further than 20.8% in 2015. During the current five-year period, federal outlays at their lowest point (20.8% in 2015) are projected to be higher than 1994-98's outlays at their highest point.

Of course, projections are not assurances. They are based on current policies, as well as current assumptions. Federal revenues may not continue to increase relative to the economy over the next two years. Then again, perhaps their increase will continue even longer.

What is certain is the subpar growth seen in this post-recession - three years of which have seen federal revenues rise significantly relative to this weak growth. If we are to look for reasons for poor current economic growth, then it is legitimate to look at such a significant series of variables as those constituting an increase of revenues of historical duration and magnitude relative to the weak economy generating them.

It is said a frog will tolerate its own boiling in water of mildly increasing temperature. However, if dropped into water hot enough to cook it, the scalded frog will promptly jump out. Perhaps, the U.S. finds itself with just such a "scalded frog" economy. Is ours now an economy that keeps leaping out meaningful growth, because its revenue water is too hot to tolerate?


J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004, and as a congressional staff member from 1987 to 2000. 

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