Current deficits reflect the crash, not structural problems

[Row6]

Since it's discussed so much, and used as a starve- the- beast club by those opposed to certain programs for reasons having nothing to do with our ability to pay for them perhaps an accounting of how we got were we are is in order. I have asked many times for those alleging that Obama has taken us on a spending spree to name some of the significant new spending he has supposedly begun and gotten no response.

"So, in fiscal 2012 (which ended September 30) we did in fact have a federal deficit of $1.1 trillion (pdf). The question is, however, whether this deficit represents, as everyone claims, a fundamental mismatch between what we want and what we’re willing to pay for — or whether it’s mainly just a reflection of the depressed state of the economy.

For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.

OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP — what the economy would have produced at full employment — was $16.5 trillion over the same period. And if the economy had been at more or less full employment, we wouldn’t just have collected taxes on the additional income; historically, the tax share of GDP varies strongly with the business cycle. If the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.

Meanwhile, on the spending side, a large part of the rise in spending came from “income security” payments — in this case, basically unemployment insurance and food stamps — which surged due to high unemployment, but are already coming down. You don’t want to attribute all of the $250 billion rise since 2007 to the state of the economy, but a large fraction surely is slump-related. Also, the slump had impacts elsewhere too — for example on Medicaid spending, probably on more people taking disability, and so on. So a conservative figure for slump effects on spending would be at least $150 billion.



Put these together: $400 billion that doesn’t increase the debt-GDP ratio; $450 billion or so in slump-related revenue loss; $150 billion or more in slump-related expenses; and guess what: the ONE TRILLION DOLLARS is basically just a depressed-economy story, having nothing to do with any fundamental mismatch between what we want and what we’re willing to pay.

And this makes a lot of sense! The budget wasn’t deep in the red in 2007, and there have been no fundamental increases in government responsibilities or cuts in taxes since then (Obamacare won’t kick in until 2014, and it’s paid for in any case)."

krugman.blogs.nytimes.com/2012/12/15/further-notes-on-one-trillion-dollars/

Krugman goes on to note that we do face structural problems beginning in the next decade which we must address, but that our current deficit problem is not related.

[orangeblueorangeblue]

Might be a compelling argument if the alternative was a reality where we didn't run deficits at all.

[Row6]

Originally Posted by orangeblueorangeblue

Might be a compelling argument if the alternative was a reality where we didn't run deficits at all.

I think the 2nd paragraph I quoted addresses that. What we spend the borrowed money on is of course important, but debt is also a major component of modern capitalism in both a personal and a business sense, and a positive one.

[Gatoragman]

Obama wil never propose a balanced budget so you are laying the ground work for no need for a balance budget.
Nice!!!!

[wygator]

What you're not addressing is what any home or business must cut expenses when revenue falls and strive to balance their budget. Many states have been doing just that.

Why shouldn't the US govt. institute budget cuts when revenues fall?

[orangeblueorangeblue]

Originally Posted by Row6

I think the 2nd paragraph I quoted addresses that. What we spend the borrowed money on is of course important, but debt is also a major component of modern capitalism in both a personal and a business sense, and a positive one.

Debt is not bad. Perpetual debt? That's bad.

[brainstorm]

Devil is in the details. Manageable debt is fine - individually we use this all the time (cars, homes, some credit for cash flow). But massive debt on a Federal level has some unintended consequences. Prices goes up for individuals. At some point, interest rates may go up (which would be a major problem). These are just a few that come to mind.

If massive debts are okay then why levy taxes? Just borrow it and forget about it.

[Row6]

Originally Posted by wygator

What you're not addressing is what any home or business must cut expenses when revenue falls and strive to balance their budget. Many states have been doing just that.

Why shouldn't the US govt. institute budget cuts when revenues fall?

A side issue, but states are having slack picked up by the feds, which remains the one place you don't want cutting when times are bad. You cut it when times are good and the economy doesn't need the pump priming.

[madgator]

Originally Posted by Row6

A side issue, but states are having slack picked up by the feds, which remains the one place you don't want cutting when times are bad. You cut it when times are good and the economy doesn't need the pump priming.

unfortunately that never happens

[bluelang]

That's an optimistic view. I certainly hope it's true, although I'd bet reality was somewhere more towards the middle.

[MichiGator2002]

There is nothing systemically wrong with the US having unfunded liabilities in excess of global GDP. Check.

[orangeblueorangeblue]

Originally Posted by MichiGator2002

There is nothing systemically wrong with the US having unfunded liabilities in excess of global GDP. Check.

Tragically this is true, but only because we (can) print the difference.

[Row6]

Originally Posted by madgator

unfortunately that never happens

See 1990's.

[Row6]

Originally Posted by MichiGator2002

There is nothing systemically wrong with the US having unfunded liabilities in excess of global GDP. Check.

The issue addressed in the OP isn't whether the deficits we have over the last 4 years are bad - of course they are, and especially since they exceed GDP and inflationary growth - but whether they were caused by unsustainable growth and other changes to long term federal policy or by reactions to the crash. The author finds they were caused by the latter though we have unrelated looming problems in the next decade that must be addressed.

[gatordowneast]

Originally Posted by Row6

I think the 2nd paragraph I quoted addresses that. What we spend the borrowed money on is of course important, but debt is also a major component of modern capitalism in both a personal and a business sense, and a positive one.

Me thinks when one is borrowing against credit card for food, clothing, gasolene, hair stylist, nail salon, health care and cell phone, than one's expenses are too high. To borrow to buy a home or car is one thing...borrowing for living expenses is a recipe for disaster. AND THAT IS EXACTLY WHAT THE FEDERAL GOVERNMENT IS DOING DAILY.

We are not borrowing to build roads, bridges and structures that last 50 years.