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Date:         Mon, 5 Oct 1992 19:16:00 EST
From:         CROSEN%BGSUOPIE.BITNET@uga.cc.uga.edu
Subject:      More on federal debt

Greetings,

A very appetizing experiment involving some chiles chipotle is bubbling in
the background, barely audible beneath the sound of Narcisco Yepes playing
a Bach lute suite on the guitar.  I have before me Allen D. Manvel's
*Paying for civilized society*, a compilation of columns that appeared
in the journal Tax Notes between 1977 asnd 1985.  Who could ask for a better
life?

ONe column reports on the results of a Bureau of Economic Analysis study that
determined the major sources of change in the annual federal deficit
between 1970 and 1986. Three sources of change are identified:

1. Automatic cyclical effects.  These reflect the automatic responsiveness
of receipts and expenditures to the business cycle.  Because federal receipts
respond much more sharply to economic growth than do federal expenditures,
this factor has tended to dampen the deficit in times of growth and enhance
the deficit when the economy turns downward or grows slowly.

2. Automatic inflation effects.  These reflect the responsiveness of
receipts and expenditures to price changes.  Both receipts and
expenditures tend to be increased by inflation, but receipts respond more
sharply than do expenditures.  Thus, the deficit increase is dampened in
times of highly rising prices.

3. Legislation and other factors.  I trust the meaning of this is self-
evident (damn, those chipotles smell good).

During the period under consideration, cyclical effects moved the budget
toward surplus by $25 billion; inflation moved the budget toward surplus by
$240 billion.  Legislation, however, moved the budget toward deficit by
$421 billion.  During this period, the ratio of receipts to GNP remained
fairly constant, at about 19.2 percent.  At the same time, Federal expends.
increased from 19.2 percent of GNP to reach 24%.

Manvel breaks this down by presidential administration and finds that during
the Carter administration (gee, is that the only democratic administration
since 1970?!?) the federal budget moved toward surplus.  In fact, since ]
1970, the only administration that has moved the budget toward surplus was
the Carter administration.  Both Nixon-Ford and Reagan witnessed "marked
shifts toward higher deficit to GNP ratios."

This is not to praise Carter over-much, since the out-of-control inflation
during his administration was one of the factors in the move toward
surplus (as it was in moderating the growth of the deficit under Nixon and
Ford).  Under Reagan, the deficit to GNP ratio rose by 2 percentage points
or "a full third more than the net rise of 1.5 percentage points that occured
during the previous 44 quarters [11 years for you humanists].  Mainly
accounting for this change is a drop of 1.6 percentage points in the receipts-to
   -GNP
ratio, more than offsetting the increases in the receipts ration that occured
in the Nixon-FOrd and Carter periods.."

Manvel concludes that during the Reagan era "legislation is found to be
the major source of deficit growth--in this instance offset far less than
in the Nixon-Ford and Carter years by the deficit-cutting impact of
inflation.  Most of the decline in inflation effects is a result of
the marked drop in the rate of inflation which has taken place during the
Reaga presidency."

Marty