Want to convince yourself the U.S. economy is deep in recession? Just block out news of almost every economic indicator and stare only at projections of what Congress’s budget deal will do to the federal deficit.
The budget deal reached early Friday morning would add an estimated $264 billion to the federal deficit over the 2018 and 2019 fiscal years, pushing the annual deficit over the trillion-dollar mark by 2019, according to the Committee for a Responsible Federal Budget.
Starting in 2019, the federal deficit will once again reach 5 percent of gross domestic product (dark red bars below), according to economic forecasts from the nonpartisan Congressional Budget Office and deficit estimates from the CRFB. The deficit hasn’t run that deep since the first half of the recovery from the Great Recession, when the economy was still struggling to heal and Congress passed several major stimulus packages.
The only other time the United States has seen deficits that significant was 1983, when President Ronald Reagan was attempting to recover from a double-dip recession and spend the Soviets into oblivion.
The chart's baseline is already adjusted for the effects of the Trump administration’s tax cuts, so the black outlines on the above chart don’t fully capture the scope of the deficit surge under President Trump. In June 2017, the CBO projected a 2019 deficit of $689 billion. After the tax cuts (and other, minor, recent legislation), CRFB projects it will jump to $999.6 billion. Under the budget deal, CRFB estimates the deficit will hit $1.147 trillion in 2019.
On its own, that extra $458 billion accounts for 2.2 percent of the country’s entire projected economic output for 2019. Add in preexisting deficits, and we can estimate that the federal government’s deficit spending will account for about 5.5 percent of the country’s economic output that year.
Deficits are typically expressed like that, in terms of their share of economic output, to account for both inflation and the changing size of a nation’s economy. After all, it’s reasonable for a government to spend more if prices are rising or if there are more citizens to whom it needs to provide services.
We’ll use this deficit-to-GDP ratio in the following charts to explain just how unusual this high-rolling budget bill is. We wanted to know: Has the government ever spent this much when the economy was doing this well?
To answer, we went back through a half-century of data and sorted major economic indicators based on where they were when the deficit-to-GDP ratio was at a given level. We compared each year’s ratio with the prior year’s economic indicators to get a better sense of the economic situation Congress would have been considering when it passed a budget.
As you probably know, the current economic expansion has been notable for its plodding pace and relative longevity. It’s rarely seen the sort of 4-percent-plus growth, adjusted for inflation, that has in the past coincided with a budget surplus or small deficit (teal bars below). But does that mean the economy is in need of fiscal stimulus?
The historical data suggest not. In the past, the deficit-to-GDP ratio has pushed past the 5 percent mark only when the economy was, on average, shrinking. Yet the budget deal is forecast to put the economy in that same stratosphere in the middle of the third-longest economic expansion on record.
One more thing about economic growth: The CBO figures and, thus, all of our estimates, assume the economy will keep growing. If it doesn’t, the deficit-to-GDP ratio could get ugly, fast. When the economy tilts into recession, the deficit side of the ratio could balloon as revenue fall and spending doesn’t, even as the GDP side of the ratio shrinks.
By running high deficits and adding to the deficit now, Congress reduces its flexibility to pass another stimulus package when the next recession inevitably arrives. Before the Great Recession, the deficit-to-GDP ratio was as low as 1.1 percent, giving the George W. Bush and Obama administrations the room they needed to take measures to stave off an even-worse economic collapse. With this bill, the United States is going in the opposite direction — just as the economy shows signs of heating up.
Economic growth is regarded as steady, if not spectacular. The labor market, on the other hand, is showing signs of finally heating up — just as Congress is ready to take a blowtorch to the deficit by adding on those extra hundreds of billions dollars.
The unemployment rate, currently at 4.1 percent, is better than the 4.5 percent (teal bar) it has averaged during times when government spending was fully in check. Yet during those previous times, the deficit-to-GDP ratio has typically been somewhere below 1 percent and actual surplus territory.
In the five years during the course of our time period when the government did take the extraordinary step of spending the equivalent of more than 5 percent of the nation’s output, the unemployment rate averaged 8.4 percent (red bar) — more than double the January level.
And yes, five years is a small sample and includes only a few, truly aberrational years. But that just proves our point: The current stimulus is unlike any other.
The economy is, at worst, ordinary. The size of the spending bill isn’t. Former top Obama administration economist Jason Furman makes the same point. Furman is now a professor at Harvard Kennedy School and senior fellow at the Peterson Institute for International Economics.
“I think we should be very worried,” Furman said. “As a macroeconomic matter, I’m not aware of another example of this — of a country that’s basically at full employment embarking on massive fiscal stimulus.”
Our analysis shows that, in the course of recent U.S. history, he’s right. This level of government spending at this time is downright odd and straight-up unprecedented.