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Federal budget update





These charts summarize the current state of the Federal government's finances. The best thing to be said is that revenue growth has outpaced spending growth since the end of the recession, with the result that the deficit has declined both in nominal terms and as a percent of GDP. The worst thing, however, is the deficit is still $1.23 trillion dollars over the past year. In the "thank goodness for small favors" department, spending as a percent of GDP has dropped from a high of 25.3% in 2009 to 23.5% today. That's still higher than during the peak of the early Reagan years, however.

One other thing to note is the dismal performance of revenues in recent years. They have risen, but at a very slow pace, and that is almost entirely due to the fact that the recovery has been miserably slow; the tax base is still way below where it was pre-recession.

The best way to fix the deficit is to keep revenues from rising in nominal terms (as has been the case since mid-2009), and find ways to boost employment. Allowing the Bush tax cuts to expire for those earning over $250K, as Obama has proposed, won't do anything to achieve that goal. More likely, it would retard the growth of employment since taxes on capital would rise significantly, hurting small business owners and entrepreneurs the most. Soaking "the rich" for a few extra dollars has a payoff that is much lower than the payoff of an increase in the size of the workforce.

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