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Long term economic trends and what they imply
#1
Here is a chart of Federal deficit since 1950.  Democratic and Republican administrations (lagged one year) are colored in blue and red, respectively. The reason for the lag is that incoming president inherits an economy and budget from his predecessor.  His policies enacted in his first year won't really have an impact on the statistics until the next year.

[Image: Deficit-fig.gif]
The chart clearly shows that both parties sought to keep the budget fairly close to balanced for the first 25 years in the chart. Average deficits during that time were 0.7% of GDP. Inflation averaged 3% and wage growth was strong.  After our "friends" the Saudis hiked oil prices 300% the budget went out of control, deficits rose to 2.7% and inflation soared to 9.1%. Conventional economics was clear on the issue, deficits needed to be brought under control as the economy recovered.  This could be done with tax increases (e.g. restore the 1968 surtax, cancelled by Nixon in 1970, or pass the necessary payroll tax increases to put that program back into solvency, as Reagan later did) or with spending cuts (future presidents found stuff to cut, why not then?). 

Well, they didn't. Hence Carter placed Volcker as Fed Chief, who promised to pursue inflation control through extreme interest rate policy, which works by suppressing wage growth, reducing wage-push inflation.  High inflation meant the wage increases workers were getting in the late seventies did not keep up with inflation, real wages fell 0.4% per year over that period (see table).  The Volcker policy was successful.  Inflation was moderated despite the enormous deficits run over the 1980's and early 1990's.  As expected, wages continue to fall at a good clip.  When Clinton was president, a determined effort was made to balance the budget, which was successful.  Positive wage growth was restored, with wage growth 1.6 percentage points higher than the prior era and 1.3 points higher than the subsequent period. After the start of the new century, we went back to running big deficits again.  And wage growth has fallen as expected.


Summary Table
Period     Deficit/GDP   Wage Growth   Inflation
1950-1974     0.7                 2.1                   3.0
1975-1981     2.7                -0.4                   9.1
1982-1993     4.1                -0.5                   3.9
1994-2001     0.1                 1.1                   2.6
2002-2016     4.2                -0.2                   2.0
Wages here are unskilled wage rates from Measuring Worth.
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Long term economic trends and what they imply - by Mikebert - 02-26-2017, 09:02 AM

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