Should Obama Have Line-Item Veto Authority?

Both federal tax revenues as a share of GDP as the smallest in post-WWII history. According to OMB estimates, federal revenues and total budget outlays as a share of GDP reached an historic post-war peak in 1945 of roughly 20% and 42% respectively. By 2009 federal tax revenues reached a post war low of 14.8% of GDP. Federal budget outlays are about 25% of GDP mostly because of declines in growth due to the recession not because spending is unusually high as a share of the economy. During Reagan's two terms, federal tax receipts averaged over 18% of GDP with total federal budget outlays averaging about 22.5% of GDP and federal deficits averaging 4.5% a year; this record is close to Obama's despite the fact that there is a much steeper recession now that in the early 1980s.

Obama's projected deficits for 2009 and 2010 as a share of GDP average about 10% a year because of the severity of the recession and the fact that Bush left him with a $1.3 trillion deficit for 2009. The anticipated growth is expected to reduce federal deficits as a share of GDP to 8.3% in 2011 when the economy is expected to sharply turn around and 5.1% in 2012. For the following three years, the OMB projects a return to normal levels of federal deficits as a share GDP averaging exactly 4% a year which is just slightly more than the historic average.

http://www.whitehouse.gov/omb/budget/Historicals/

The point is that currently the average effective rate of taxation is very low Borrowing rather than taxing is the largest source of revenue. This is fine so long as interest rates and inflation remain low. There is no cause to worry about the deficit. The savings rate is high meaning that the government is spending what the private sector is saving in the form of treasury bonds. There is high unemployment and low capacity utilization which means that only fiscal stimulus, at this time of a slack economy and low consumer borrowing and spending, can stimulate economic growth.

Paul Krugman explains;

"You know, first thing to say is people are putting their money where their mouth is, which is the bond market. Things were fine. You know, the U.S. government is able to borrow long-term at 3.3 percent interest rate. So, obviously, you know, the market is not convinced. Now, the market has been wrong. But, then if you do the arithmetic, these numbers look huge. The American economy is huge. The debt burden, even after five years, is going to be, a share of GDP, well below levels that lots of industrial countries have reached in the past, including ourselves after World War II, when we were able to handle that just fine. [...] we're now paying 1.2 percent real interest rate on federal debt. Even if you add 50 percent of GDP in debt, which I don't think is going to happen, that's still only a fraction of a percent of GDP in additional debt service costs."

http://www.huffingtonpost.com/2009/11/30/krugman-deficit-hawks-try_n_373976.html

The deficit hawks have it wrong.

steve of IL 12:15PM June 25, 2010