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Federal budget update

This chart includes federal revenues and outlays through October, 2011. The budget deficit was $1.26 trillion in the previous 12 months, which is about what it's averaged over the past year. But the big-picture takeaway is shown in the chart above. Federal spending has more than tripled since 1990 (+209%), while nominal GDP rose only 172%. Revenues are lagging, with an increase of only 130%, but that is easily explained by the depth of the recent recession and the very tepid recovery to date. The lion's share of the budget deficit is due to a hugely disproportionate increase in outlays, which, contrary to the Keynesian theories that were used to justify the increased spending, has almost certainly contributed to the economy's current weakness.

If deficit-financed fiscal expenditures could strengthen an economy, ours would be one of the strongest in the world right now. Instead we find ourselves following perilously close, and in the footsteps of, the PIIGS. The solution for all countries burdened by bloated government spending should be obvious but not necessarily painful: simply enforce serious cutbacks in the growth rate of spending. For example, if federal spending were frozen at current levels, and revenues were to increase at only the rate they have posted in the past year (a rate that would be very low compared to the typical growth rate of revenues following recessions), then the federal budget would be balanced in less than 7 years.

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