Another deficit solution

Discussion in 'Politics' started by Ricter, Apr 13, 2011.

  1. Ricter


    First, don't make it worse:

    "Will the Budget Cut Deal Hurt the Economic Recovery?"
    By Stephen Gandel


    "Most people seemed to agree that the narrowly avoided government shutdown would have hurt the economy. But the question is whether the budget deal struck to avert the shutdown will hurt the economy more than if Washington had just turned off the lights?

    "The budget deal struck by President Obama and John Boehner and other Republicans over the weekend will cut $38.5 billion from government spending in the next year. Generally, when the government spends less that slows the economy, just like when consumers or companies spend less. That was afterall the reason many people thought a government shutdown, which would have temporarily slashed government spending and furloughed 800,000 government workers, would have hurt the economy.

    "Thomas Lam, who follows the US for OSK-DMG Economics Group, says the budget deal could reduce real GDP growth by at least 0.4%. The unemployment rate, which recently stood at 8.8%, could end up anywhere from 0.2% to 0.4% higher than it would have been without the deal. And Lam is not alone. Nor is he the most worried. Diane Swonk, chief economist at Chicago-based Mesirow Financial, says negative impact of the budget deal could be more than double Lam's estimate or 0.9%. She now estimates that GDP will grow 3.3% in 2011, down from a pre-deal estimate of 4.2%.

    "But, strangely enough not everyone thinks the budget deal will hurt the economy. Mark Zandi, of, for one, says the budget deal will have a minimal affect on U.S. growth. Some even say it could boost the economy and jobs. Here's why:

    "First of all, as Zandi points out, the economy is in better shape than it was a year ago. So perhaps some reduced amount of government spending won't be noticed as companies and individuals begin to spend more. Perhaps. But in looking for a bright side of the government cuts, the New York Times repeats this argument for why the budget cuts might boost the economy:

    "'As the government spends less it borrows less, and companies can borrow more. As the government collects less money in taxes, companies may increase spending and investment.“This cut combined with other cuts in entitlement reform will give the economy and businesses and investors some positive news on the fiscal front in Washington,” said Chris Edwards, director of tax policy studies at the Cato Institute, a libertarian think tank that favors even larger reductions in the federal spending.'

    "My problem with that first paragraph is that companies don't have a borrowing problem. Remember, IBM was able to borrow at just 1% last year. Any large company that wants money has been able to get it and get it at historically low rates. Yes, there have been some small companies that have been unable to borrow. But that is because of a lack of credit. And the people who see upside from cutting government spending are making an interest rate argument not a credit argument.

    "In the end, the question of whether the budget deal will hurt or help the government comes down to what you believe about our debt level. If you believe we are at some breaking point where we are about to hit some serious questions about whether we will be able to pay back all the government has borrowed, then yes the budget deal could boost growth by keeping interest rates low. If not, then this budget deal is likely to slow the recovery somewhat. How do we decide whether America is at the debt breaking point? Well that's the topic of another blog post."

  2. Ricter


    Second, get off your butt and get back to work. The "other" blog post:

    "Will Faster GDP Growth End the Debt Debate?"
    By Stephen Gandel

    "Washington is absorbed with how much it has to cut in order to get our financial house in order. And the conclusion by many is that President Obama's proposed budget, which lowers the amount of debt we are set to take on in the next decade by $1 trillion, doesn't cut enough. Former Bush staffer and a former member of the Financial Crisis Inquiry Commission, one of the dissenters, republishes this chart from a Congressional Budget Office report showing a resulting large budget deficit that follows right off the page. Hennessey's take away, "The long-term budget problem starts now."

    "But the politicians and policy wonks like Hennessey may be forgetting a key piece of the debt puzzle: growth. Yes, spending and taxes matter. And those are the debates we are having. But the growth rate of the economy is also a key determinate of how large our deficit is, perhaps even more so than the other two. And that part of the equation is starting to look at lot better. It turns out if you assume a slightly higher GDP growth rate, you don't have to cut nearly as much out of the budget as you think to get back to essentially a balanced tally, and well out of the government goes broke scenario. Here's why:

    "Why does GDP matter to the debt equation? Faster GDP growth boosts tax revenues for the government because individuals and companies produce more income, and therefore, hopefully, pay more to Uncle Sam. It also lowers the amount of money the government has to pour into such social safety programs as unemployment and food stamps. Mark Zandi, of Moody's, says a back of the envelope calculation is that for every extra dollar of GDP, the government's tax take rises by $0.35.

    "The reason this all matters now is that all of a sudden, after three years of doldrums, a growing number of economists think our growth picture is looking up. This week, the Federal Reserve increased its estimate for what the economy would grow in 2011. The US central bank thinks the GDP could rise as fast as 3.9% this year. That's up from the 2.7% estimate that the government made a year ago, which is the figure that was used to compute that the deficit in 2011 would reach nearly $1.6 trillion, our worst ever.

    "So how much does faster GDP growth matter to the deficit? It depends what time frame you're talking about. The 1.2 extra percentage points of growth this year will lower the deficit by an estimated $60 billion, or to $1.54 trillion. So not much. But if you assume that the higher growth will continue for some time then even a little bit of extra growth matters, a lot in fact.

    "On our current path, the next ten years of budget deficits are supposed to add around $7 billion to our national debt, which would grow to nearly $18 billion. (Please Note: I am just talking about debt held by public, not our total debt, which includes Social Security and other transfers. The CBO excludes, and has under both Republican and Democrat leadership, so I think I am on solid ground. No need to correct me.) But here's what's got most people freaked out. On that path, government debt as a percentage of GDP would equal 76%, and it would continue to grow. That would be up from 40% in 2008, and double the 40-year average of 36%. Some say this will crimp growth. Others say this will bankrupt the government. To say the least, it's worrisome.

    "But if the economy instead grew just 0.1% better a year than expected over next ten years, it starts to be a different story. On that path, by 2021 the debt to GDP percentage is still a troubling 74%, but it would be dropping rather than rising at that point. Assume the GDP grows an extra 1.1 percentage points a year, and our nation's budget deficit nearly disappears. That troubling debt to GDP ratio comes in at 55% at 2021, lower than it is today, and on a path that is dropping sharply.

    "How likely is it that the economy will grow an extra 1.1 percentage points a year in the next decade. Well, I went back and looked at the CBO's budget report from 1991 - a time when we were similarly dismayed about our economic future. Back then, the CBO estimated that the economy would grow by an average of 2.6% a year for the next five years. Instead, the economy ended up growing 3.7% a year through much of the 1990s. If more politicians realized that, perhaps we would be talking a little less about cuts, and more about growth."
  3. Hello


    Sorry Ricter but this part of article is ridiculous. How could anyone in their right mind dismiss the fact that we are at a critical level right now? If we continue on Obamas plan till 2020, we will have a debt of more than 20 trillion. The interest alone on 20 trillion is going to cost us 600 billion per year. We can currently afford about 2 trillion dollars of spending, so if we just continue on this path, by the year 2020, 1 third of the budget is going to go to interest.(3% of 2 trillion = 600 billion) Then we have ballooning entitlement costs as well as ballooning military costs. How the hell can we afford to pay for anything by 2020 if we only have 1.4 trillion to spend and the military will cost us more than a trillion and medicare and social security will each cost more than a trillion. Thats 3 trillion dollars of expenses with only 1.4 trillion to spend. And we havent even gotten into any other government expenditures. One would have to be truly delusional to believe we are not at a critical level already.

    Obviously reducing spending is going to slow the economy, We could throw 2 trillion dollars at the economy and it would create jobs, but eventually we would have to pay for that.

  4. Ricter


    From where I sit optimism is called for. Rising sales aside for the moment, our creditors keep loaning us money--either they believe they'll be repaid, or they don't care if they're not repaid. I think it's the latter, I think half the world's loans are actually a form of tribute, which we're paid for enforcing a useful if sometimes chafing order.
  5. Hello


    Do you really believe the U.S. government is going to simply quit paying interest? The results would be disastrous. Especially when we are running a deficit. Who is going to buy bonds after the first time the government misses payments?

    You think China is going to shrug and say "fuck it" if the U.S. quits paying them back? They will dump every single bond they own and drive interest rates to 20% if we just decide to quit paying.

  6. Lucrum


    It's going to take a lot more than that to solve our budget deficit crisis.

    In related news Dumbo proposes cutting the deficit by $4T between now and 2023. Which of course is just another way of saying he wants to continue spending like a drunken sailor and let someone else fix the spending mess. Would his plan come under the heading of "hope" or "change" I wonder. It's certainly not leadership.
  7. Ricter


    My optimism is not unfounded; sales are rising, and many of those are exports, perhaps the best kind. I and most of my peers believe conditions will improve over the next six months. We're busy and we're hiring. Seacan traffic, road freight... rising. Road is already higher than it was pre-crisis.
  8. Crispy


    Deficit Hai ku -

    Kabuki theatrics again in Rome.

    The Summer of Keynes slips closer to Fall.

    They never intended to solve.
  9. Hello


    Im actually somewhat optimistic about the economy as well, but it doesnt change the fact that the deficit is a major road block. Even if GDP was to grow by 3% for the next 10 years, all that will do is cancel out the added interest, and that doesnt make up for the fact that government spending is growing at a far higher rate then 3%.
  10. Lucrum


    I didn't mean to imply it wasn't. Only that optimism alone isn't going to stop our federal government from spending us into the financial abyss.
    #10     Apr 13, 2011