The Fiscal Cliff is a problem. We typically blame people not named us when problems occur. It’s easier and less painful than solving the problem. Here the problem is that the current US President and Congress (The US Senate in particular)* have both spectacularly failed in their management of the national fisc. And worse than that, they came to a fork in the road, after the crisis of 2008, and specifically chose *not* to manage our nation's fiscal affairs. This innumerate choice of directions lead America to the so-called Fiscal Cliff.
If we decided to solve America’s fiscal issues, it wouldn’t hurt to mine some historical data. Since 1950, the United States Government has averaged expenditures proportional to 19.61% of the same year GDP with a standard deviation of 2.25%. Our government has booked revenues equivalent to 17.65% of same year GDP with a standard deviation of 1.26%. If both events occurred at random, we’d have a 6.07% chance of a Federal Budget actually balancing.** This would suggest that we’ve set up a systemic and nasty spending problem despite pious insistence otherwise.
The United States Government used to attempt to manage this problem. From 1950 through 2001, the US Government balanced the budget 15 times in 51 years. This sucks, but remember that the background probability of a balanced budget occurring at random was only 6%. The government was actually attempting to govern and thereby had a likelihood of balancing the budget that was 5 times higher than it would have been had our leadership just went surfing in Hawai’i.
Since 2003 and especially since 2008, no spending plan was contrived that had any relation whatsoever to the probable level of revenue that the US Government historically succeeds in collecting. It is as if we hit a fork in the road last decade. Our leaders decided that our government no longer had an obligation to manage Federal Expenditures. The chart below shows how unlikely it was that any of our last eleven budgets even could have been balanced assuming a typical year of historical government revenues.
Another way to see the divergence from any fiscal responsibility is to examine expenditures versus revenues as a proportion of GDP. This shows a veritable alligator jaw of divergence in the last ten years.
In Real Budget Year Dollars, this chart looks properly scary***. Here’s the revenue vs. expenditure chart in TY$B.
To view this monumental screw-up more dispassionately, we can take the Natural Log of the expenditure axis and see revenues vs. expenditures in LN(TY$B). Again we see the recent divergence between what we should spend (Revenues) and what we foolishly waste (expenditures). As Led Zepplin once put it, The Song Remains the Same.
America’s political decision makers have increasingly opted to divorce the expenditures the masses demand from any pretense of trying to budget revenue to make these payments. The end result is an increasingly tenuous economic situation that we now term a Fiscal Cliff. The result of going off this cliff could be a realization that we chose the wrong fork back in 2003. Then from 2008 on foolish treaded the accelerator while headed in the wrong direction. Only by limiting our future expenditures to what our society is willing and able to pay to the government as revenue can prevent future renditions of the bad situation in which we find ourselves now.
*-Few organizations could fail to produce a working budget for 1,400 days and stay in existence. Harry Reid has set some sort of record.
**-Assume both are normally distributed and plot the mean expenditure on the bell curve of revenues to get that figure.
***-You can’t make a good economic horror chart w/o some exponents blasting to the heavens!