What deficit?

[oldfart]

After five years of Sturm und Drang over the deficit, maybe it's time to discuss thereal problem, which is certainly not the deficit. CBO has an interesting study out which tie in nicely.

First, the goal is not a zero deficit. The commonly accepted goal by fiscal experts and economists is a deficit which causes the national debt to increase at the same rate as GDP or less. In other words, the ratio of national debt to GDP would remain the same or decrease. So what is this number?

Given a publicly held debt of $11.5 trillion (the $16 trillion bandied about includes inter-agency debt and shouldn't be counted in debt unless we are also going to count all the government assets; what an aircraft carrier worth? oil reserves on public land? the Eisenhower Interstate Highway System? If we are going to do a balance sheet and declare the government insolvent, where's the listing of assets? I digress.) Assuming a conservative nominal growth rate of GDP of 4% (2% real growth, 2% inflation) this works out to $450 billion or so of sustainable deficit.

OK, deficits grow when the economy is in the tank. Tax revenues fall faster than income when we have a progressive income tax system, and expenses such as unemployment benefits, disability retirees, and other "automatic stabilizers" increase. Without the countercyclical nature of these automatic stablilizers, today the economy would have about 40% unemployment and GDP would be 25% lower. Put another way, if we had "real austerity" we would be in the 30's again. Put a third way, every effort at balancing the budget in a major downturn inevitably drives the economy toward disaster of Dickensian proportions.

So what would the deficit be if we were not in an anemic recovery? What if the economic stabilizers were at the normal near-full-employment levels? The recent CBO study calculates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.
CBO | The Effects of Automatic Stabilizers on the Federal Budget as of 2013

So if the cyclically adjusted deficit for 2013 will be $423 billion and the sustainable deficit is $450 billion, if we do nothing EXCEPT rapidly return the economy to normal levels of employment. the share of debt to GDP will DECREASE slightly. And how do we return the economy to health? STIMULUS.

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

 

[polarbear]

I`m an engineer, not an economist but I`ll give it a try.
If you run an ever increasing deficit then you will also increase the debt and that is the problem. The U.S. debt to GDP ratio is already over 100% !
...and what makes it worse is that ~1/3 rd of that debt is owed to foreign countries. So what kind of system are you proposing here?
A system that costs more than it can produce ?
Austerity had nothing at to do with the 1930 depression, but your system would bring on another crisis that would dwarf the 30`s
We have been using a FIAT monetary system before you were even born and the only collateral behind it are the goods we produce. That in turn is taxed and the taxes are supposed to at least pay the interest on the debt before the government spends even more money...which is in essence what you are proposing by letting the DEFICIT grow with the GDP.
It was this ideology that led us into the FIAT money trap in the first place, because there was not enough real collateral in existence to back up the money that a government has to put into circulation.
If you got a $ 17 trillion debt and a $17 trillion GDP it follows that $34 trillion FIAT money dollars have been issued by the treasury.
If you let the dept grow at an even higher rate with a deficit that`s slaved to the GDP there is no end to how much more paper money you have to print...
twice as much as it would take without the deficit and the debt it piles up.
That`s why a barrel of oils cost`s at least twice as much DOLLAR bills as it would if oil was priced in another currency that`s issued by a country that does not issue money as if it were toilet paper.
It will take more than one future generation to produce the goods that are supposed to be the collateral for all that paper money and then a farmer can`t afford to eat one of the eggs his chickens have laid.
Take a look around you. There are some countries that don`t have a debt or a deficit and others that have a debt but not a deficit.
There is no way you could sell the nonsense you are proposing this "Greekonomoy" treadmill to countries like Liechtenstein or Switzerland.

 

[PaulS1950]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

 

[onecut39]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

Back in 1947 the US debt was 258 billion dollars. The GDP was 245 billion dollars

The world did not end. In fact over the next 50 years we would rebuild Europe, fight 5 wars (big ones and a lot more small ones) while building huge projects like the interstate system, the space program and congratulated ourselves for spending the USSR into oblivion.

In 50 years our 16 trillion ollar debt may look just as insignificant as the 258 billion one looks now. If we don't panic that is and ruin both the economy and the country.

 

[boedicca]

After five years of Sturm und Drang over the deficit, maybe it's time to discuss thereal problem, which is certainly not the deficit. CBO has an interesting study out which tie in nicely.

First, the goal is not a zero deficit. The commonly accepted goal by fiscal experts and economists is a deficit which causes the national debt to increase at the same rate as GDP or less. In other words, the ratio of national debt to GDP would remain the same or decrease. So what is this number?

Given a publicly held debt of $11.5 trillion (the $16 trillion bandied about includes inter-agency debt and shouldn't be counted in debt unless we are also going to count all the government assets; what an aircraft carrier worth? oil reserves on public land? the Eisenhower Interstate Highway System? If we are going to do a balance sheet and declare the government insolvent, where's the listing of assets? I digress.) Assuming a conservative nominal growth rate of GDP of 4% (2% real growth, 2% inflation) this works out to $450 billion or so of sustainable deficit.

OK, deficits grow when the economy is in the tank. Tax revenues fall faster than income when we have a progressive income tax system, and expenses such as unemployment benefits, disability retirees, and other "automatic stabilizers" increase. Without the countercyclical nature of these automatic stablilizers, today the economy would have about 40% unemployment and GDP would be 25% lower. Put another way, if we had "real austerity" we would be in the 30's again. Put a third way, every effort at balancing the budget in a major downturn inevitably drives the economy toward disaster of Dickensian proportions.

So what would the deficit be if we were not in an anemic recovery? What if the economic stabilizers were at the normal near-full-employment levels? The recent CBO study calculates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.
CBO | The Effects of Automatic Stabilizers on the Federal Budget as of 2013

So if the cyclically adjusted deficit for 2013 will be $423 billion and the sustainable deficit is $450 billion, if we do nothing EXCEPT rapidly return the economy to normal levels of employment. the share of debt to GDP will DECREASE slightly. And how do we return the economy to health? STIMULUS.

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

XXXXXXX

SRSLY

We have three choices, none of which are easy:

1. Cut spending and live within our means
2. Default on the debt
3. Print more money

The Fed has already done 3 via QE^Infinity, and the coming staglation will be the price. 2 is not feasible given the magnitude of our debt and its global impact. That leaves 1. At a minimum, just flat lining current levels of spending would be a start. But give that spending has increase more than 25% in real terms since 2007, it's ludicrous to believe that all of that spending is essential for the country to function.

 

[onecut39]

After five years of Sturm und Drang over the deficit, maybe it's time to discuss thereal problem, which is certainly not the deficit. CBO has an interesting study out which tie in nicely.

First, the goal is not a zero deficit. The commonly accepted goal by fiscal experts and economists is a deficit which causes the national debt to increase at the same rate as GDP or less. In other words, the ratio of national debt to GDP would remain the same or decrease. So what is this number?

Given a publicly held debt of $11.5 trillion (the $16 trillion bandied about includes inter-agency debt and shouldn't be counted in debt unless we are also going to count all the government assets; what an aircraft carrier worth? oil reserves on public land? the Eisenhower Interstate Highway System? If we are going to do a balance sheet and declare the government insolvent, where's the listing of assets? I digress.) Assuming a conservative nominal growth rate of GDP of 4% (2% real growth, 2% inflation) this works out to $450 billion or so of sustainable deficit.

OK, deficits grow when the economy is in the tank. Tax revenues fall faster than income when we have a progressive income tax system, and expenses such as unemployment benefits, disability retirees, and other "automatic stabilizers" increase. Without the countercyclical nature of these automatic stablilizers, today the economy would have about 40% unemployment and GDP would be 25% lower. Put another way, if we had "real austerity" we would be in the 30's again. Put a third way, every effort at balancing the budget in a major downturn inevitably drives the economy toward disaster of Dickensian proportions.

So what would the deficit be if we were not in an anemic recovery? What if the economic stabilizers were at the normal near-full-employment levels? The recent CBO study calculates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.
CBO | The Effects of Automatic Stabilizers on the Federal Budget as of 2013

So if the cyclically adjusted deficit for 2013 will be $423 billion and the sustainable deficit is $450 billion, if we do nothing EXCEPT rapidly return the economy to normal levels of employment. the share of debt to GDP will DECREASE slightly. And how do we return the economy to health? STIMULUS.

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

SRSLY

We have three choices, none of which are easy:

1. Cut spending and live within our means
2. Default on the debt
3. Print more money

The Fed has already done 3 via QE^Infinity, and the coming staglation will be the price. 2 is not feasible given the magnitude of our debt and its global impact. That leaves 1. At a minimum, just flat lining current levels of spending would be a start. But give that spending has increase more than 25% in real terms since 2007, it's ludicrous to believe that all of that spending is essential for the country to function.

You forgot the obvious. Get the economy growing again and there will be a flood of new tax revenue.

If you cut spending and once again depress the economy your tax base will dry up making the economy crash a self fulfilling prophecy.

 

[Mad Scientist]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

Back in 1947 the US debt was 258 billion dollars. The GDP was 245 billion dollars

The world did not end.

Now is 2013. American Government owned by Bankers ship all good paying and manufacturing job to overseas.

America have Large Goverment.
America have Large Debt.
America have No Tax Base to pay off Debt.

Soon Dollar crash and worthless.

America is done.

Communism only way out.

 

[oldfart]

I`m an engineer, not an economist but I`ll give it a try.

If you run an ever increasing deficit then you will also increase the debt and that is the problem. The U.S. debt to GDP ratio is already over 100% !

You are confusing two different concepts here. Roughly speaking, the deficit is equal to the annual increase in the national debt. If there is a deficit, the public debt grows by definition. This is not necessarily a bad thing. Treasury bonds provide long range stable investments for many individuals, businesses, and even serve as international reserves for many countries. Millions used to save using US savings bonds. The supply of all these is the deficit. The debt-to-GDP ratio depends on the relative growth rate of public debt and GDP. In the original post I noted that a deficit of $450 billion in 2013 would leave the ratio unchanged. As an engineer, I know you appreciate the difference between speed and acceleration. It's the same thing here.

...and what makes it worse is that ~1/3 rd of that debt is owed to foreign countries.

As I noted, the dollar is a reserve currency for the world, like sterling, the yen, gold, and SDR's. Foreign government demand for Treasuries has mostly to do with the stability of the world economy and other reserve currencies.

So what kind of system are you proposing here?
A system that costs more than it can produce ?

I am proposing that in accord with generally accepted fiscal theory we look at public debt as a percentage of GDP in measuring size of debt and that the deficits we measured not in strict nominal terms but by the CBO's "sustainable debt" deficit calculations. This results in a public debt that does not increase in proportion to the economy, which I think is what you mean by "costs more than it can produce".

Austerity had nothing at to do with the 1930 depression,

I think you have been reading too much revisionist economic history. Austerity was exactly the policy of the Hoover administration 1929--1933 and the Federal Reserve. A stock market bubble was stabilized for over a year, then developed into a financial panic, and eventually into a depression. None of this would have happened (or has happened to that degree since) because monetary and fiscal policy was guided by the lessons of 1920--1938.

but your system would bring on another crisis that would dwarf the 30`s

Not according to any economic model I have seen. Of course if you believe in the confidence fairy and similar figments of fevered imaginations, you are using and have no need for economic models. You just need a shaman.

We have been using a FIAT monetary system before you were even born and the only collateral behind it are the goods we produce. That in turn is taxed and the taxes are supposed to at least pay the interest on the debt before the government spends even more money...which is in essence what you are proposing by letting the DEFICIT grow with the GDP.

Poppycock and balderdash. First I doubt if you know when I was born, and I remember a time when most of our currency was convertible into silver. Today virtually all money in the world is "fiat money". Of course it is backed by what it can buy. All money, including specie is. Get a grip, man.

I've already answered why the deficit can grow with the economy, but if you have an argument to the contrary, state it rather than rely on invectives.

It was this ideology that led us into the FIAT money trap in the first place, because there was not enough real collateral in existence to back up the money that a government has to put into circulation.

What, pray tell is "the FIAT money trap" other than a fairy tale used to scare small children and separate honest working folk from their hard earned money through gold bug promotions? And what is "collateral in existence to back up the money that a government has put into circulation"? Are you proposing a return to a commodity standard? An end to fractional reserve banking?

If you got a $ 17 trillion debt and a $17 trillion GDP it follows that $34 trillion FIAT money dollars have been issued by the treasury.

You have made no argument supporting the idea that the money supply is determined by the size of the public debt plus the size of the economy. Look up the economic statistics; currently M2 (the most commonly used measure of money supply is at about ten trillion dollars. Your math doesn't add up.

If you let the dept grow at an even higher rate with a deficit that`s slaved to the GDP there is no end to how much more paper money you have to print...
twice as much as it would take without the deficit and the debt it piles up.

Again, your math seems off. I never proposed a deficit larger than the CBO-defined "sustainable deficit". Yes, as the economy grows, there will be more currency issued. This was even true under the gold standard. It's Bagehot's "trade bills" theory of banking.

That`s why a barrel of oils cost`s at least twice as much DOLLAR bills as it would if oil was priced in another currency that`s issued by a country that does not issue money as if it were toilet paper.

I don't see any foundation for this assertion. The price of oil is generally determined in dollars and the price to other countries is that price times the exchange rate. We pay no more for oil in dollars than we would if we paid for it in yen or Euros. What currency we use for settlement is irrelevant.

It will take more than one future generation to produce the goods that are supposed to be the collateral for all that paper money and a farmer can`t afford to eat one of the eggs his chickens have laid.

Again, the value of currency is not determined by "collateral".

Take a look around you. There are some countries that don`t have a debt or a deficit and others that have a debt but not a deficit.
There is no way you could sell the nonsense you are proposing this "Greekonmoy" to countries Liechtenstein or Switzerland.

I do look around me, but apparently unlike you I do not rely on ideological blogs of Austrian monarchists for my statistics or theory. I use the figures published by commonly accepted national and international sources, which if you are serious about economics, you should access when making arguments. If you like, I will be happy to provide a list of the most useful URL's.

I have relatives in the banking industry in Switzerland (my maternal grandfather was born there) and trust me, Swiss bankers do not make decisions based on the kind of claptrap you have been reading.

I sincerely hope you take the time to educate yourself on how national and international financial systems and economies actually operate. You clearly have the ability to do well with it.

 

[oldfart]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

I'm not sure what your point is. ALL economic data grow expotentially with time. And why do you believe the public debt "has to be paid back some day"? Are you going to rip the savings bonds out of the hands of small children who get them for Christmas from old-fashioned grandparents (like me)? Force all investors in US Government bond funds to liquidate their investments? Tell the banking system and foreign central banks they can't hold US government securities anymore? Really?

In case you didn't notice, there is a market for US government securities. Are you suggesting that government Dictat replace a free market? Is that capitalism?

 

[oldfart]

This is galactically ignorant....SRSLY

Starting with an ad hominem. Not a good auger for a logical presentation.

We have three choices, none of which are easy:

1. Cut spending and live within our means
2. Default on the debt
3. Print more money

Balderdash and poppycock! Says who?
1. We could raise taxes and "live within our means". BTW what exactly does "live within our means" mean for a national economy? I gave the CBO defition in the OP. What's yours?
2. The only people talking about defaulting on the debt are deficit hawks. No one else, including the financial markets, seems to to give the slightest credence to that possibility.
3. Of course we will print more money. As the economy grows, the need for money increases. Have you heard of liquidity theory?

The Fed has already done 3 via QE^Infinity, and the coming staglation will be the price. 2 is not feasible given the magnitude of our debt and its global impact. That leaves 1. At a minimum, just flat lining current levels of spending would be a start. But give that spending has increase more than 25% in real terms since 2007, it's ludicrous to believe that all of that spending is essential for the country to function.

Are you making a prediction here? Are you one of those who has been predicting exploding interest rates because of the deficit and hyperinflation for the past five years? Has the fact that people who based investment decisions on this hypothesis have lost billions of dollars not given you pause? How many years in a row do you have to be spectacularly wrong before you re=evaluate your wretchedly bad economic model?

 

[Deepbluediver]

First, the goal is not a zero deficit. The commonly accepted goal by fiscal experts and economists is a deficit which causes the national debt to increase at the same rate as GDP or less. In other words, the ratio of national debt to GDP would remain the same or decrease. So what is this number?

Why shouldn't it be zero? Every dollar we spend to several our overall debt is a dollar that can't be spent on anything else. By maintaining a debt and deficit, we continually foster this "tax" on our tax-dollars.

I'm honestly asking here, nothing I said is being done flippantly (ok, well, MOST of it isn't; I get snarky on occasion).

the $16 trillion bandied about includes inter-agency debt and shouldn't be counted...

What exactly do you mean by that? I'm a little confused, and I want to make sure I understand this.

Assuming I'm correct in my understanding, then the money should be counted as a debt by one agency and an asset by another, but that asset is not the same as the governments other hard assets (how many people are actually in the market for aircraft carriers?)

Assuming a conservative nominal growth rate of GDP of 4% (2% real growth, 2% inflation) this works out to $450 billion or so of sustainable deficit.

Why is inflation counted as part of growth?
From what I've seen, GDP growth over the last decade has been much more like 2.5%
United States GDP Growth Rate

OK, deficits grow when the economy is in the tank. Tax revenues fall faster than income when we have a progressive income tax system, and expenses such as unemployment benefits, disability retirees, and other "automatic stabilizers" increase. Without the countercyclical nature of these automatic stablilizers, today the economy would have about 40% unemployment and GDP would be 25% lower. Put another way, if we had "real austerity" we would be in the 30's again. Put a third way, every effort at balancing the budget in a major downturn inevitably drives the economy toward disaster of Dickensian proportions.

When times are good, politicians seems to say "look at the money flowing in! We can afford this!" and when times are bad, they say "we need to spend more or things will get worse".
So when should we balance the deficit then?

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

How did that work out for Greece?
Oh right, their economy ran along just fine, until people stopped lending the government money. The problem with living on borrowed cash is that someday you actually need to pay it back.
And when the government can no longer borrow money, and decided to print it instead? Well, I'll just leave this link here:
Hyperinflation - Wikipedia, the free encyclopedia

Also, since you're good with numbers, how much (approximately) will we need to spend to get the economy moving again? From what I've seen, we've spent quite a bit and not achieved a whole lot.
Real stimulus spending estimated at $2.5 trillion since 2008 | The Daily Caller

The United States has basically been relying on it's (admittedly) good reputation and HUGE economy (we're still the biggest, by a fair margin) to keep itself propped up financially. But you can't assume that this will allow us to ignore basic economic principles forever.

 

[oldfart]

First, the goal is not a zero deficit.

Why shouldn't it be zero? Every dollar we spend to several our overall debt is a dollar that can't be spent on anything else. By maintaining a debt and deficit, we continually foster this "tax" on our tax-dollars.

The goal could be zero. But that would only be the right goal by accident. A deficit is also the supply of government securities. Government securities have a free market and to some extent the smooth operation of the world and domestic economy require an adequate supply of these securities. Great damage was done the world and American economies during the 1880's and early 1890's during the "Long Depression" when the growth of world trade outstripped the growth of the gold supply and thus the monetary base. What's wrong with letting markets set the desired level of government securities issues?

the $16 trillion bandied about includes inter-agency debt and shouldn't be counted...

What exactly do you mean by that? I'm a little confused, and I want to make sure I understand this.

Assuming I'm correct in my understanding, then the money should be counted as a debt by one agency and an asset by another, but that asset is not the same as the governments other hard assets (how many people are actually in the market for aircraft carriers?)

Most of the difference between total government debt and publicly held debt is the trust funds. Since these are redeemed in accordance with the financial needs of the trust funds, they are not usually included in national debt. The United States and Denmark are the only two nations on the face of the earth that publish debt statistics including what is owed the trust funds. This is also the reason for the wide divergence of debt-to-GDP international comparisons many people have put out; they use the world standard for other countries and and OMB figures for America. It's comparing apples to fruit salad. The source that gets it right, with a good explanation, is the CIA Factbook, best source of all international comparative statistics.

The Chinese recently bought an aircraft carrier. But you are right to note that many assets of the government have no ready market. How would you value such assets?
Replacement cost? Scrap value? Beats me.

Why is inflation counted as part of growth?
From what I've seen, GDP growth over the last decade has been much more like 2.5%
United States GDP Growth Rate

I used the figures that CBO used in their report. You can use real ( inflation-adjusted) figures or nominal figures, but you have to be consistent. Deficits are almost always expressed in nominal figures. If you converted them to real figures, you could do the computations based solely on real growth rates, and end up with the same numbers.

Of course if you used the 2.5% real growth rate instead of 2.0%, that adds about $90 billion to the sustainable deficit.

When times are good, politicians seems to say "look at the money flowing in! We can afford this!" and when times are bad, they say "we need to spend more or things will get worse".
So when should we balance the deficit then?

Our recent history is that Progressives have cut spending and turned deficits into surpluses only to have Republicans look at the surpluses and decide to cut taxes on the rich. Why didn't we use half of the 2001 and 2003 tax cuts to reduce the deficit? If your point is that we should run surpluses in good years, I could live with that. But what I prefer is to set the deficit or surplus based on the needs of the economy to curtail inflation or promote economic growth.

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

How did that work out for Greece?

Greece's problem has little to do with spending and everything to do with the trade imbalances inside the Eurozone (primarily created by German banks) and the Greek national pastime of tax evasion. Almost nothing has been done to address either, and
Greek austerity is demonstrating what the most recent IMF study shows: austerity in this type of situation increases the debt, tanks the economy, and destroys social and political stability.
The Challenge of Debt Reduction during Fiscal Consolidation

Oh right, their economy ran along just fine, until people stopped lending the government money. The problem with living on borrowed cash is that someday you actually need to pay it back.
And when the government can no longer borrow money, and decided to print it instead? Well, I'll just leave this link here:
Hyperinflation - Wikipedia, the free encyclopedia

I used to help edit that article. Maybe you should read it again.

Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation.

I don't see anything in the article that supports any position you have stated.

Also, since you're good with numbers, how much (approximately) will we need to spend to get the economy moving again? From what I've seen, we've spent quite a bit and not achieved a whole lot.
Real stimulus spending estimated at $2.5 trillion since 2008 | The Daily Caller

In late 2008,the incoming Chairman of the Council of Economic Advisors, Christine Romer, complained that to be effective the stimulus need to be at least $1.8 trillion. We got less than half that. The stimulus was not well structured, having too much in the way of tax cuts and too much political pork added to get it passed. The $6 trillion of bailouts were basically wasted money, not stimulus. Given current conditions, I believe a good figure would be $1.2 trillion or so over four years. By the time politicians finish marking it up that's about $6 trillion of spending, most of it wasted. Personally, I think the amount is not as important as how it is spent. Congress will probably blow $10 trillion over the next decade in totally useless spending that accomplishes nothing except to make us a banana republic.

The United States has basically been relying on it's (admittedly) good reputation and HUGE economy (we're still the biggest, by a fair margin) to keep itself propped up financially. But you can't assume that this will allow us to ignore basic economic principles forever.

Agreed. But the most basic economic principal is that a society in the long run consumes only what it produces. If we can't focus on producing more, we will be toast regardless of what the federal budget looks like.

All the best,

Jamie

 

[Underhill]

I don't see this as a right or wrong question. It's not pay of the debt or there's no problem, keep spending.

Both sides are at least partially right. The debt levels right now are not the end of the world so long as we recognize there is a problem and we need to address it soon.

But the bigger problem is not the debt at all. It's the death of manufacturing. And as long as that trend continues, there is no long term recovery. We cannot continue to be a service economy and expect things to get better. Manufacturing is where wealth is created. Bankers pretend to create wealth, but it does very little for most of the country.

The communist is right about one thing, like it or not. Without a strong middle class, our country will not prosper. And without manufacturing, we cannot have a strong middle class.

 

[jwoodie]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

I'm not sure what your point is. ALL economic data grow expotentially with time. And why do you believe the public debt "has to be paid back some day"? Are you going to rip the savings bonds out of the hands of small children who get them for Christmas from old-fashioned grandparents (like me)? Force all investors in US Government bond funds to liquidate their investments? Tell the banking system and foreign central banks they can't hold US government securities anymore? Really?

In case you didn't notice, there is a market for US government securities. Are you suggesting that government Dictat replace a free market? Is that capitalism?

The public debt doesn't have to be paid back some day, but the interest on it does. Do you think ultra-low interest rates can last forever? 5% interest on $20 trillion will be $1 trillion per year. Even if you could raise taxes that much, you would still need to freeze all other expenditures just to avoid even higher interest payments.

 

[Flopper]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

I'm not sure what your point is. ALL economic data grow expotentially with time. And why do you believe the public debt "has to be paid back some day"? Are you going to rip the savings bonds out of the hands of small children who get them for Christmas from old-fashioned grandparents (like me)? Force all investors in US Government bond funds to liquidate their investments? Tell the banking system and foreign central banks they can't hold US government securities anymore? Really?

In case you didn't notice, there is a market for US government securities. Are you suggesting that government Dictat replace a free market? Is that capitalism?

I agree. We will never payoff the debt because we don't have to pay it off. People often think of government debt in the same way they think of individual debt. The fact is there is little or no resemblance between the two.

What's important is how US debt stacks up against other nations which includes:
Political stability
Governments ability to meet interest payments
Interest rates compared to other nations

As long as investors are willing to buy US debt without demanding premium interest rates and the growth rate of US debt is under control, there is no problem.

 

[Wiseacre]

Deficits matter cuz you have to pay interest on the money you borrow. It's around $360 billion in FY2012, projected to be over $400 billion this year and that's with interest rates around 2%. The historical rate is up near 6% and the debt could reach $25 trillion in 10 years. So, who's ready to spend a trillion dollars a year just in interest payments?

That's not to say we have to balance the budget in the near term, I see no reason to risk another bad recession by cutting the spending that much. Nothing wrong with the sequester cuts IMHO, although Obama and democrats should have forgone the political grandstanding and agreed to a deal to shift the cuts around to ameliorate the impact. C'mon, 2.5%, don't give me this crap that the US Gov't can't find a way to reduce the INCREASE in this year's spending by a measly $85 billion out of a $3.6 trillion budget. It's not like we're trying to spend less money this year than last year.

The signs are there, in the polls; people don't like that much gov't spending and debt. Sure, nobody wants their particular piece of the pie cut, but as time goes on and that debt grows bigger along with the amount of interest to service it, I think there's going to be a growing concern over the issue, more than it is now. Not sure if it'll be a big deal in 2014, but it could be in 2016 if the debt approaches $20 trillion and the nothing is done to make the entitlement programs sustainable.

 

[PaulS1950]

The interest we pay to China for their part of our national debt is enough to completely cover the cost of running their military....
Do you think that is in the interest of national security?

 

[Quantum Windbag]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

Back in 1947 the US debt was 258 billion dollars. The GDP was 245 billion dollars

The world did not end. In fact over the next 50 years we would rebuild Europe, fight 5 wars (big ones and a lot more small ones) while building huge projects like the interstate system, the space program and congratulated ourselves for spending the USSR into oblivion.

In 50 years our 16 trillion ollar debt may look just as insignificant as the 258 billion one looks now. If we don't panic that is and ruin both the economy and the country.

Back in 1948 we cut federal spending by 40%. I could have missed the news but I am pretty sure the world did not end then either.

 

[Quantum Windbag]

After five years of Sturm und Drang over the deficit, maybe it's time to discuss thereal problem, which is certainly not the deficit. CBO has an interesting study out which tie in nicely.

First, the goal is not a zero deficit. The commonly accepted goal by fiscal experts and economists is a deficit which causes the national debt to increase at the same rate as GDP or less. In other words, the ratio of national debt to GDP would remain the same or decrease. So what is this number?

Given a publicly held debt of $11.5 trillion (the $16 trillion bandied about includes inter-agency debt and shouldn't be counted in debt unless we are also going to count all the government assets; what an aircraft carrier worth? oil reserves on public land? the Eisenhower Interstate Highway System? If we are going to do a balance sheet and declare the government insolvent, where's the listing of assets? I digress.) Assuming a conservative nominal growth rate of GDP of 4% (2% real growth, 2% inflation) this works out to $450 billion or so of sustainable deficit.

OK, deficits grow when the economy is in the tank. Tax revenues fall faster than income when we have a progressive income tax system, and expenses such as unemployment benefits, disability retirees, and other "automatic stabilizers" increase. Without the countercyclical nature of these automatic stablilizers, today the economy would have about 40% unemployment and GDP would be 25% lower. Put another way, if we had "real austerity" we would be in the 30's again. Put a third way, every effort at balancing the budget in a major downturn inevitably drives the economy toward disaster of Dickensian proportions.

So what would the deficit be if we were not in an anemic recovery? What if the economic stabilizers were at the normal near-full-employment levels? The recent CBO study calculates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.
CBO | The Effects of Automatic Stabilizers on the Federal Budget as of 2013

So if the cyclically adjusted deficit for 2013 will be $423 billion and the sustainable deficit is $450 billion, if we do nothing EXCEPT rapidly return the economy to normal levels of employment. the share of debt to GDP will DECREASE slightly. And how do we return the economy to health? STIMULUS.

The only economically viable program is to ditch austerity and deficit reduction, which prolong the Great Recession indefinitely and use stimulus to return the economy to economic health. This is what sensible economists have prescribed for similar although less severe situations for the last fifty years with success, and what they have been advocating for the last five years. It's the politicians and ideologues who are tone deaf.

SRSLY

We have three choices, none of which are easy:

1. Cut spending and live within our means
2. Default on the debt
3. Print more money

The Fed has already done 3 via QE^Infinity, and the coming staglation will be the price. 2 is not feasible given the magnitude of our debt and its global impact. That leaves 1. At a minimum, just flat lining current levels of spending would be a start. But give that spending has increase more than 25% in real terms since 2007, it's ludicrous to believe that all of that spending is essential for the country to function.

You forgot the obvious. Get the economy growing again and there will be a flood of new tax revenue.

If you cut spending and once again depress the economy your tax base will dry up making the economy crash a self fulfilling prophecy.

If spending money was the way to get the economy growing it would have happened by now.

 

[Quantum Windbag]

The flaw in your plan to decrease the "debt" through making it "lower" compared to GDP is playing with percentages and not facing the amount owed. You can lower the percent of debt but you still have to pay it back someday in dollars not in percent of GDP.

I'm not sure what your point is. ALL economic data grow expotentially with time. And why do you believe the public debt "has to be paid back some day"? Are you going to rip the savings bonds out of the hands of small children who get them for Christmas from old-fashioned grandparents (like me)? Force all investors in US Government bond funds to liquidate their investments? Tell the banking system and foreign central banks they can't hold US government securities anymore? Really?

In case you didn't notice, there is a market for US government securities. Are you suggesting that government Dictat replace a free market? Is that capitalism?

Umm, what?

You do understand that, when your grandchildren grow up, the cash in those savings bonds, don't you? By doing that they force the government to pay back its debt. What you are advocating is the equivalent of telling your grandchildren that they have to borrow money instead of cashing in the bonds you give them.