A Brief History of the Federal Budget Deficit and Surplus (Such as it Was)

The Congressional Budget Office (CBO) has issued its September 2008 budget and economic update. The CBO estimates that the deficit in 2008 will be over twice the shortfall of 2007, rising from $161 billion in 2007 (or 1.2% of GDP) to $407 billion in 2008 (about 2.9 percent of GDP). The CBO says:

The significant expansion in the deficit is the result of a
substantial increase in spending and a halt in revenue
growth. In 2008, CBO estimates, federal spending will be
8.3 percent higher than it was in 2007; at the same time,
total revenues will be less than they were in 2007.

Total Federal Budget Deficit (Surplus) 1967 - 2008 (actual) - 2018 (projected)

Source: CBO

The only time in recent history the Federal budget has run a surplus was for four years (1996 - 2001) of the Clinton administration. Although the economy has soured due to stagnating wages, layoffs, the credit crunch, and the housing debacle, the Federal deficit is in no where near as bad shape as it was during the stagflation era of the '70s and early '80s.

We will have to wait and see about the CBO's prognostications. As Yogi Berra said, "Prediction is very hard, especially about the future."

Defense outlays comprise nearly 66 percent of Federal discretionary outlays. It costs alot to be the policeman of the world:

Federal Discretionary Budget Authority: 2002 - 2008

Source: CBO

Contributing to the run-up in the record price of oil, the CBO report shows that demand for oil has far outpaced the supply since 2005, and year-over year demand growth has also outstripped supply growth since 2005.

World Oil Supply and Demand: 2002 - 2008

Source: CBO

Data shows that the great oil price run-up of the '00s, not seen since the early 1980s, dates from the beginning of this mismatch in oil supplies and oil demand. Tell me again why Congress needed to hold hearings on this issue? Couldn't they just have read their own report?

Oil Price Trend: 1976 - 2008

Source: WSJ

The Inflation Story

The producer price index (PPI) is up 8.8% year over year, partly due to higher energy and higher commodity prices. But consumer prices are up only 4% on all items and 2.2%, excluding energy and food. This means that producers have been eating about 5% in gross margins to keep prices low. Discount retailers have been holding the line on prices as well, reluctant to give ground to any competitor. But if the PPI continues at this level or higher, eventually manufacturers and retailers will have to cave, accelerating the growth of inflation even more.

Producer Price Index is up 8.8% this year (8-19-08)

Core Inflation and Consumer Price Index through August 2008

At the same time, union membership has been falling steadily for the past two decades and outsourcing of white-collar information worker jobs gives workers less room to negotiate higher wages and salaries.

Partially offsetting the rise in prices, the dollar has been rising against foreign currencies, mostly due to their weakness, rather than the strength of the US economy. This makes imports cheaper and helps hold the line on inflation.

The Dollar Exchange Rate vs the Yen and Euro

All told, at the end of four years a 4% inflation rate, where the overall consumer price index is today, results in a $100,000 salary being worth only $80,000.

The Fed will have to turn its attention to this issue sooner rather than later if it wants to avoid a repeat of the stagflations of the late '70s and early '80s.