O.K., let’s just think about this budget thing for a while, Part I
To be sure, the U.S. government deficit is shocking; but it’s not anymore shocking than the recession through which we have all lived. Tax receipts plummeted (see the second chart from this post) and spending on cyclical social programs (like unemployment benefits) is surging. This adds up to an exponentially rising budget deficit, and thus an increasing debt burden.
The resulting hysteria leads to headlines like that from Reuters on March 11, 2010: “Fed’s Dudley: Waiting to fix fiscal problems risky”.
Be very careful when reading these articles, as the title implies that William Dudley, president of the New York Federal Reserve Bank, is advocating “fixing fiscal problems” right now – cutting spending and/or raising taxes now – while that is not the case at all. According to Reuters, Dudley says:
The issue, Dudley said, is not fiscal stimulus, which he noted had been necessary in the United States to stabilize the economy, even though it drove up the deficit. That spending is temporary, he added. The bigger long-term problem for the United States and other advanced economies is structural deficits — those likely to persist absent changes in tax and spending policies.
A link to Dudley’s speech. He does refer to structural deficits that may result from recent countercyclical policy. However, these long-term structural deficits have essentially nothing to do with the current downturn, in my view. In fact the effects of the current deficits are simply a speed bump on the road to structural indebtedness.
Just look at the CBO’s extended-baseline projection for the long-term budget published in June 2009.
This above scenario projects the spending share on social security, Medicare and Medicaid, and Other Federal Noninterest Spending through the medium and long term under current law. Notice the blip that is 2009 and 2010?
What is key to this outlook is the assumption on economic growth and productivity trends (among others, of course!). GDP is assumed to grow an average 2.2% per year. I didn’t delve into this full report and conduct a full alternative scenario test. But it is pretty clear that GDP growth of anything less than 2.2% (on average) – holding all else equal, of course – would have a deleterious impact on the outlook for government financing.
Japan provides a perfect case study of what not to do when the economy is recovering from a financial crisis: raise taxes too soon. You do that, and the probability of a “lost decade” rises quickly. You suffer a lost decade, and the outlook on the structural budget looks a lot worse than that illustrated above.
Marshall Auerback has argued time and time again that the government should run deficits until private saving adjusts so that the economy can stand on its own two feet, i.e., grow. As long as the currency floats and is fully non-convertible, the government’s debt burden will not become a solvency issue. Hence, his interview titled fighting deficit hysteria.
I would say, rather, that the deficit hysteria is appropriate, but very much misallocated intertemporally toward the short-term outlook.
Part II coming to a post near you!
This article is crossposted with News N Economics
Minor nit: “This adds up to an exponentially rising budget deficit, and thus an increasing debt burden.”
Given normal inflation, we should generally have an exponentially increasing deficit, right? And if that is indeed normal, the exponentially increasing debt should not be a burden, right?
(Since it is easy to be misunderstood online, let me add that I do not think that the government should never run a surplus, nor that there are no problems with the national public debt. At the same time, since we, as a nation, have decided to create money by, in effect, borrowing it, to say that the national debt is a burden is to say that having money is a burden. OC, we could decide to create our money without borrowing it, but that is another question.)
Well, I look forward to seeing part 2, hope you provide a solution. I think deficits are important to consider though, for example the CBO never projected the stimulus package years ago, if no one was concerned about deficits then what would prevent a series of stimulus packages. What I’m saying, is that the stimulus package is a short-perspective action, but when this kind of action becomes continual, then it practically is a structural problem.
Not if tax revenues (based on rising nominal wages) and spending are likewise rising together with inflation. The problem is if wage and income growth lag behind because aggregate demand falls back (of other possibilities, of course) with premature government tax hikes – no inlfation pressures there. Rebecca
spepost,
What I’m saying, is that the stimulus package is a short-perspective action, but when this kind of action becomes continual, then it practically is a structural problem.
Which is exactly why the initial stimulus needs to be large enough to do the job. The surest way to make sure countercyclical deficits become a permanent way of life is to try and get by on the cheap.
pete peterson and his deficit-scare crowd bubble up to the surface of the news narrative whenever a dem gets elected president, they quickly disappear when a gop president is elected
they were silent on the impact of defict creating legislation like the unfunded bush wars, the bush tax cuts, the unfunded medicare part-d, the unfunded medicare advantage plans, and the TARP piece de resistance were set in motion
they have no credibilty
they will be standing on soap boxes preaching deficit doom for the rest of obamas first term and they will be trying to scare everyone in the next presidential election
Great wave floating just ahead of us!
The concern over budget deficits always kicks in when countercyclical policy does, i.e., during a recession…or when it is most needed. Rebecca
Doesn’t the problem with the debt arise when the economy show signs of overheating, that we have too much money at such times?
Er…I, a mere physics major long ago, do not see anything resembling ‘exponential’ increases. Am I missing something or are you folks drinking too much tea?
This here is an exponential function…. or are you economics folks using some ‘RayGun’ math I dont’ know about.
These numbers are pure cloud-cuckoo land.
The health of the economy is determined by collective capital wealth production, preservation, and formation.
The upcoming medicare burden is comical. Every doctor in the land will be bringing in a ten million dollars net; doctors will own us and the economy will revolve around them.
While this is wealth preservation to some extent, for old people it is also a form of consumption.
Debt, borrowing, taxes. I don’t see the difference. Every bond sold is a tax or tariff (I’m looking at you, PRC & OPEC) opportunity that was missed.
Much of the productivity gain since 1995 has simply substituting a customs guy for a factory floor. Customs guy is 1000X more productive than hiring labor locally.
Everything is so balled up I don’t think there’s any solution.
Am I missing something or are you folks drinking too much tea?
These graphs are a percentage of gdp, which is a t1 = 1.02*t0 exponential function.
2% pa growth to infinity, baby! In 2100 we’ll have a $130T/yr economy. WooT! $325,000 per person. We’ll be rich!
You all!
The deficit is not illustrated anywhere in the post; but it would look more like a backward L than an exponential function. The debt forecast does, however, look exponential (see figure 3.1).
Rebecca
Hi Rebecca:
Figure 3.1 is in the SS sction (I believe). Were you referring to Fig. 1.5 which is an “L” on its back?
Wow, I meant Figure 1-3! Okay, we’ll let that one slide. The alternative scenario is rather exponential. Rebecca
In thining of the budget, if it happens at the sate level, why would it not happen at the Fed level? What? This: “Final tax data from 2008 now proves what many predicted but had been strenuously denied by Democrats in Annapolis: Maryland’s high income earners are voting with their feet.“
From a $106M estimate increase in revenue, the reality has been a $267 reduction. But, that ole class warfare continues. Why increase taxes on the most mobile of our tax paying populace, and continue to expect revenue increases?
If you base your politics on life being about fairness, then you are seriously deluded about budget politics. How many liberal/progressive policies need to fail before they are realized as just plain wrong headed?
BOTH parties have a credibility gap when it comes to the deficit, debt, and more importantly the unfunded liabilities not included in budget projections.
More importantly is the $2 trillion in unfunded state/city government pension liabilities:
Promised pensions benefits for public-sector employees represent a massive overhang that threatens the financial future of many cities and states.
http://online.barrons.com/article/SB126843815871861303.html?mod=BOL_hpp_highlight
And it is the federal government that will probably pick up the tab. Yes the U.S. can probably pile up more debt in the short term, but at some point it will become a problem. Just like too much debt caused the current economic crisis.
Sounds like an argument for getting rid of states. They were a stupid idea in 1783 and they’re still a stupid idea today.
In any event, at some point higher tax rates do reduce revenues. We have some pretty good estimates as to where that revenue maximizing point is. We’re not there. State revenues are strongly pro-cyclical, which is exactly why the federal government should behave counter-cyclically.
Sound like an argument for fiscal responsibility.
er
wasn’t it the great liberal Dick Cheney who said “deficits don’t matter.”
Rebecca
after all this time and you still don’t get it.
social security and medicare are NOT “government spending.” they are a way for workers to save their own money for their own needs.
sorry if you do not understand this.
but if you cut medicare where are you going to get medical insurance without paying as much?
and if you cut Social Security, where are you going to get a pension you can live on that is as safe?
Okay, perhaps “spending” in the sense that it is a consumption good is the wrong terminology, better an “outlay”. This article is in no way meant to take a stance on the merit of entitlement programs. Because that is what they are, entitlements.
But it is and “outlay” nevertheless, at least on the Treasury’s income statement that is. To be sure, the social security is a pay-as-you-go system, but the government is now responsible for the spend-as-you-accept over the years. Hence a liability on the balance sheet.
The government can print money in order to pay for the benefits as they come, but that is unsustainable throughout this long-term forecast. And just to be sure, one can put some sort of band-aid on the social security problem (like increasing the age for eligibility) but you cannot change the medicare/medicaid without robust reform.
And back to the initial point of the post – if you screw up this recovery, we may be looking at a decade of growth that is not sufficient to meet even the projections above, and the financing situation looks a lot worse.
Rebecca
Because that is what they are, entitlements.
entitlement is a meaningless term. SS is a government-run pension fund that has $2.5T of the people’s money invested in sovereign debt, paper that happens to be our own treasuries.
Including $60,000 of contributions taken from my salary. I’m currently scheduled for 15+ years of retirement income from this, so the actuarial break even for this “entitlement” is age 82. Seems about right for a government program.
and the financing situation looks a lot worse
Numbers don’t mean anything. What matters is the wealth production vs. consumption of the people — the workers and the layabouts — of this nation.
If we require drugs to go off-patent for medicare-d we can save $15T this century. That is not insignificant.
Old people really don’t consume much in the scheme of things. The already have all the consumer goods they’re going to need. They just need a roof over their heads, heat, lights, and a TV running news shows.
Health care services are the biggy and we’re going to have to find a better way than paying millions of dollars for elder care cases.
A return to Reagan, Nixon, or Eisenhower taxation levels would not harm our economy one iota. The only difficulty with the financial outlook is failure of political will, and that stems from 80% of this country being at best under-educated (if not outright mis-educated) idiots.
coberly,
Okay, perhaps “spending” in the sense that it is a consumption good is the wrong terminology, better an “outlay”. This article is in no way meant to take a stance on the merit of social security and medicare programs.
But it is and “outlay” nevertheless, at least on the Treasury’s income statement that is. To be sure, the social security is a pay-as-you-go system, but the government is now responsible for the spend-as-you-accept over the years. Hence a liability on the balance sheet.
The government can print money in order to pay for the benefits as they come, but that is unsustainable throughout this long-term forecast. And just to be sure, one can put some sort of band-aid on the social security problem (like increasing the age for eligibility) but you cannot change the medicare without robust reform.
And back to the initial point of the post – if you screw up this recovery, we may be looking at a decade of growth that is not sufficient to meet even the projections above, and the financing situation looks a lot worse.
Rebecca
REbecca
i think you are still missing the point. retired people spend money. it’s better they spend their own money… saved for them through the federal government “pay as you go” plan… than that they collect welfare… or have the age of eligibility increases so half of them die before they ever collect their own money. the “fix” is an increase in the payroll tax from time to time that adjusts income to meet outgo that may increase if we all live longer or some other catastrophe strikes the republic.
even medicare is a way for the people to pay for their own health insurance… which they need, and will need more of if they want the more expensive treatments expected in the future. that is them paying for their own needs, with the government simply regulating the pay as you go financing so that inflation… even medical inflation.. is mooted out of the equation. this is perfectly fair, unless you expect medical costs and life expectancie to drastically FALL from one generation to the next.
the “fact” that its all carried on the government books is in the first place not a fact. social security and medicare are kept “off the books” for a reason. (not entirely, but to the extent they are not, it has been a mistake). it is an serious error to confuse the people paying for their own old age “through” the federal government… with “government spending.”
i don’t know if you know enough about Social Security for it to do you any good, but if you can, think about what SS is and does, and don’t be fooled by the words.
for instance… how do you propose to pay for health care for old people? have you got something that will work better than Medicare? and IF you can’t control health care costs generally, how do you propose containing them for Medicare… short of denying care? and how do you propose to pay for the retirement of workers… oops, you already answered that: just don’t let them retire. now why didn’t i think of that? by the way, can you find my granny a job?
if this recovery is screwed up it will be screwed up by the economists who are sure they can outsmart the fact that no one makes… or even grows… anything in america anymore. hey, there’s another great idea. lets all become financiers. and the old people can work for us as butlers and maids and washerwomen. we can pay them with chinese money.
Troy
you might want to check your diploma. that 60,000 should last about three to six years depending on your income level. or double that to include your employer contribution, then you are up to six to 12 years, the latter figure being about right, but actually probably less than you will get because the benefits are wage indexed and will include a premium that covers inflation and the general rise in income levels since you started paying in.
throw away the goddam TV. the news shows are all lies anyway. use the time to read the Trustees Report, and then do a little honest research to understand what it means. some arithmetic the Trustees don’t want you to do would also help.
but it won’t help much, because the decisions are going to be made by people who either understand it less than you do, or are lying through their teeth.
It is interesting that CBO excluded interest on the debt in its chart presentations last June.
Coming forward, the CBO analysis of the President’s FY2011 Budget conservatively projects net interest payments for FY2010-2020: ($ billions)
209 244 298 365 440 520 596 676 755 834 916
I suppose a cool $1 trillion in net interest payments in FY2021 might raise a few concerns among the public.
http://www.cbo.gov/ftpdocs/112xx/doc11231/frontmatter.shtml
and
http://www.cbo.gov/ftpdocs/112xx/doc11231/index.cfm
MG
i suppose it will. the public being given to “golly! gee whiz!” whenever they hear a really big number. like the number of angels dancing on the head of a pin. all “trillion” means is that we are a big country with a small dollar.
what might matter is whether the country is going to grow fast enough to “service” the debt, or if we are going to actually have to raise taxes to pay for the stuff we have been buying since we elected “government is the problem” Reagan and “deficits don’t matter” Cheney.
all signs are that we are too stupid to do that.
easier to blame in on Social Security.
Coberly,
Decades (heck centuries) of deficits are not going to be solved by raising taxes right now. The very last thing in the world that the government should do right now is to try and balance the deficit. If we do that, then look out for a serious problem, as this recover heads south with the double dip.
It’s looking more and more like the economy’s NOT going to grow fast enough to service the debt. What the government needs to do now is run more deficits, let tax revenues recover with the labor market, and allow the private sector to delever. Only then will growth be sustainable. As long as the currency floats and we can print money, the government can sustain deficits long enough to ensure a recovery? Look at Japan.
In fact, I welcome a smart depreciation of the dollar, at least that would drive exports and an improvement of the current account (structurally, that is and with a little near-term pain).
Rebecca
MG,
Fannie and Freddie are curiously neglected on the Treasury’s balance sheet as well.
Rebecca
On a tangent, I’m curious, from where did you gain conviction that a stimulus package is the correct solution to a recession, books, academics, government? – just trying to figure out where people learn from.
There isn’t an MBA in America who would have trouble choosing between making 30% on credit card debt versus 5% on a shoe factory–regardless of the strength of the dollar.
Balance the deficit–wait, what?
Check out this CNBC Squawk Box fight earlier Monday:
Scroll down to the video
http://www.cnbc.com/id/35870550
Here’s Moody’s quarterly Sovereign AAA Monitor released on Monday. Info on the U.S. is covered on pages 14-17.
http://www.zerohedge.com/sites/default/files/Moodys%20AAA%20Sovereign%20Monitor.pdf
Well worth a read.
Hi MG,
These are good, too:
http://www.newdeal20.org/?p=8230
http://www.newdeal20.org/?p=8939
Rebecca
Actually the “debt” could be paid off right now if desired. Here’s how
All those bonds (which are like savings accounts at the fed) could be turned into non interest bearing reserves. It all could happen with a key stroke on a computer. Of course, then the previous bondholders would have to figure out what to do with their money that is no longer earning interest.
Debt GONE. However it would not improve our fiscal situation at all so why do it.
spepost,
From textbooks, academics and papers. In your garden variety recession we would want to lean heavily on monetary policy; but this isn’t your garden variety recession and the Fed Funds Rate is already at zero. Nontraditional monetary policies are worth trying, but there’s no guarantee that they will work and they come with a lot of baggage as we try to unwind quantitative easing. Fiscal policy is something that we at least understand and know will have a stimulative effect as long as the Fed accommodates.
Rebecca
Social Security doesn’t need a tax raise “right now.” It may need one in 2026.. about eighty cents per week.
A tax raise right now of about 2 tents of a percent on incomes over 100k would provide the cash for Congress to meet its debt TO Social Security without having to borrow more. Such a small tax raise will have no effect on the economy whatsoever. Whatever they teach you in Sunday School.
I don’t know much about the Japanese recession, except that the Japanese weren’t too interested in ending it because they did not have a “need to consume.” That might have had as much of an effect as whatever tax raise you are talking about.
Your fear of tax raises is a primitive superstition.
but just to be clear, i am not too worried about the deficit myself at the moment. just a little bit, because the congress seems to think it can run the country without raising taxes, and that is what has led to the debt. until we recover from that delusion, the future doesn’t look good.
steve:
Thank you for raising the Capital versus Labor issue. Toss in the 1960-something Marquette versus First Mutual outlawing usury and we begin to understand.
Coberly,
Michael Pettis writes a nice piece about the misconceptions of the Japanese consumer in the 1990s. Basically, consumption did grow faster than the economy; hence dropped the consumption share (part of the necessity for rebalancing). It’s just that investment fell faster, so the economy slumped. There’s a lot of moving parts when it comes to rebalancing.
http://mpettis.com/2010/03/stuck-in-neutral-%E2%80%93-what-japan%E2%80%99s-rebalancing-can-teach-us/
You’re right not to “worry” about the deficit.
Rebecca
Rebecca
i think there are a lot of moving parts in the economy. and when the economists get worried about just one of them, i can bet they have completely lost sight of the rest of them.
How much of a burden is the Federal debt?
From http://www.usgovernmentspending.com/budget_pie_gs.php
For fiscal 2011, projected interest payments / GDP (in billions) = 250.7/15299 = 1.64%
Oh, the horror! 😉