Why deficit, WHY?!

So, the country has been running a deficit the last few years. This is not news. Many in the media credit it to a vast run-up in government spending under Obama. Yes, spending has gone up on things like food stamps and other government relief programs that are used more in a recession. BUT, a large drop in government revenues also occurred and this comprises a large part of the deficit. The corresponding chart below shows taxes collected as a percentage of GDP.

Note how the most recent peak was around 2007, before a sharp drop when the recession hit, with the government's take going from ~18 down to 15% of GDP. Considering the size of our economy, that is a lot of revenue lost. Another relevant point I'll make is that politicians occasionally will make a platform out of promising to fix government spending at a certain percentage of GDP. With the huge baby-boom cohort now retiring, Social Security and Medicare will be soon be covering a large portion of the population. Thus, it's quite impractical (and a little insane, really) to think this can be done with the same amount of spending or revenue.

In a day or two I'll highlight how the markets are essentially yawning at this heightened amount of debt the government has issued, despite our politicians recent (and hypocritical) freakout about it.

Lowest tax rates ever?

I'll continue with my schtick of providing historical context in the run-up to the election. If one gets enough of this context (both across countries and time), a number of the candidates' platforms seem quite silly. Tonight we show US top marginal income tax rates over time:

Now, if you go back even further you can find that income tax rates in the late 1920s were temporarily similar to those of today. So, essentially, we currently have tax rates at their lowest levels (save a few of the Bush 1 years) since before the Great Depression. In the 1920s, recall, we didn't have Medicare, Medicaid, Social Security, unemployment insurance, etc. So, if you hear someone complaining that our income tax rates are holding back small businesses or entrepreneurs, ask yourself: compared to when?

And, yes, you could argue and say that it's not just the top marginal rate that matters, but also the income at which the rate goes into effect. The fact that effect tax rates on the rich are at near all time lows, for example, is noted in this Poltifact piece: "for those in the top 0.01 percent of the income distribution, the effective tax rate was 71.4 percent in 1960, 74.6 percent in 1970, 59.3 percent in 1980, 35.4 percent in 1990, 40.8 percent in 2000 and 34.7 percent in 2004. If lower taxes did actually deliver economic growth, then our country should be booming! Also, is it any wonder we're having trouble paying for our social safety net with these kind of declining contributions?

No, our incomes don't just feel like they're stagnating

I thought more historical context might help make better voters out of us, so we'll soldier on in this same vein. The figure below shows the US median income over time according to the census bureau (I discussed this also here). The accompanying report can be found here. The gist? While income gains move temporarily up and down with recessions, it appears that median incomes are lower now than they were in 2000 (twelve years ago!). Couple this with the data on high-income earners I showed yesterday, and you find that the rich are doing very well, while the middle class have been treading water. And I think this is under-appreciated, but the median household income in this country is ~$50,000. Since many households rely on two incomes, I'm starting to picture an America where most people earn at or below $30k per year. Not quite what you'd expect from watching television or listening to politicians. Maybe we're not as rich as we thought we were.

Return to the Guilded Age?

Just finished the presidential debate and was surprised at how reasonable both candidates sounded tonight. Because of this similarity, I wanted to provide a little under-appreciated historical perspective. This figure shows the share of total income going to the top one percent.

Do you notice the effect of FDR's policies and/or see the middle class being borne in the late 40s? Do you remember who won the election in 1980? Sure, there is some noise in the figure, but the trend seems pretty clear. Why doesn't the middle class generally vote in its economic self interest?