Monday Moneybeat: Government spending

BUMPER MUSIC: The Money Shuffle / BBCPM005: Retro Electro – Paddy Kingsland [PRS]

MARY REICHARD, HOST: Coming next on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: Next time you lament partisan politics in Congress, consider this: the 2018 bipartisan budget act set federal spending to increase at twice the rate that federal revenue increased. 

Why does that matter? 

Because last week, the government reported the federal deficit hit its highest level in seven years: $984.4 billion for Fiscal Year 2019. That’s a 26 percent increase year on year, and the deficit’s on track to hit $1 trillion next year and stay there until something changes.

Almost every news story on this subject last week and this weekend blamed the 2017 tax cut for lost revenue, but it’s at best misleading. Revenues have grown ever since the rate cut and we have a growing economy to thank for that. In simple terms, lower tax rate, bigger tax base. It’s possible government might’ve collected more revenue with higher tax rates, but there’s no guarantee the economy would’ve grown as it did without the stimulus of the rate cut. 

That’s why people disagree about economics.

What’s not in dispute is that spending has exploded the deficit, and mandatory entitlements are the biggest drivers. Another is service on the national debt, one of the fastest-growing line items in the federal budget. Interest costs rose 16 percent and accounted for more than a third of the deficit.

This is a large deficit, historically speaking, almost 4 percent of gross domestic product. The average since World War II has been to run a deficit equal to a little over 2 percent of GDP. The worst period followed the great recession of 2008: for three years, the deficit as a fraction of GDP exceeded 8 percent. 

What’s worrying about this 4 percent deficit is it comes in the 11th year of a record-long period of economic expansion.

REICHARD: Another winning week on Wall Street and we have two factors to thank for that: One is that almost half of the Standard & Poor’s 500 companies have reported earnings and most of them are better than expected. The other factor is progress on ending the trade war with China. The S&P 500 stock index enjoyed its third-straight winning week, picking up 1.2 percent, and so now it’s one-tenth from its record high set back in July when the weather was hot and so was the market.

EICHER: Rounding out the other major indexes, all positive: The Dow Jones Industrial Average rose seven-tenths, the Nasdaq added 1.2 percent, and the Russell 2000 small-company index gained 1.5. And that is today’s Monday Moneybeat.

(AP Photo/Richard Drew) Trader Michael Milano works on the floor of the New York Stock Exchange, Monday, Oct. 7, 2019. 

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