Category Archives: DEFICIT

Wise words from Rudy Penner on the debt limit

 

The real place to negotiate over spending and tax matters, including entitlements, is when you’re debating the budget resolution. That’s when we set our targets for spending and revenues.
Having a separate debt limit—I don’t think it has served much of a purpose. It certainly hasn’t brought about fundamental reforms in entitlements.

Wise words from Rudy Penner on the debt limit
dkuehn
Tue, 11 Feb 2014 02:24:00 GMT

Two Approaches to Fiscal Policy

I think it is fair to point out that Reagan’s big spending was likely more for defense than now, and the decline is from a huge peak under President Obama.

Consider the following graph, with both series (coincident series for economic activity) normalized to 2011M01=0.

cawi1.png
Figure 1: Log coincident economic indexes, both normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.

One series pertains to the state I live in now (Wisconsin), and has pursued a policy of spending cuts and tax cuts skewed towards high income groups. The other is the state I lived in before coming to Wisconsin (California). It dealt with the serious fiscal problems it faced in part by cutting spending, and by raising taxes. Interestingly, both states had new governors taking power in January 2011 (Walker in Wisconsin, Brown in California). And in both cases, one party holds power in both houses of the legislature, as well as holding the governorship — Republicans in Wisconsin, Democrats in California.

It’s not surprising to anybody with acquaintance with data (or just plain reality) that the red line is Wisconsin, the blue is California. While this is not a controlled experiment — there are many other variables of importance (although they both share the same monetary policy) — the comparison is suggestive.

So, for completeness’s sake, here is the figure again, series labeled, and the US series added.

cawi2.png
Figure 2: Log coincident economic indexes for California (blue), Wisconsin (red), and US (black), all normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.

More on California here.

Two Approaches to Fiscal Policy
Menzie Chinn
Tue, 27 Aug 2013 04:00:02 GMT

Zandi Testimony: Economy Poised for Growth, Congress must Fund the Government and Pay the Bills

 

Economist Mark Zandi is providing testimony this morning to the Joint Economic Committee: Written Testimony of Mark Zandi Chief Economist and Co-Founder Moody’s Analytics

The impasse in Washington over funding the federal government and increasing the Treasury debt ceiling is significantly damaging the economy. Stock prices are grinding lower and consumer confidence is weakening. The economic harm will mount significantly each day the government remains shut and the debt ceiling is not raised. If policymakers are unable to reach agreement on these issues by the end of October, the economy will face another severe recession.
To resolve the budget impasse, policymakers should not add to the significant fiscal austerity already in place, which is set to last through mid-decade. Tax increases and government spending cuts over the past three years have put a substantial drag on economic growth. In 2013, this fiscal drag is as large as it has been since the defense drawdown after World War II.
Moreover, because of fiscal austerity and the economic recovery, the federal government’s fiscal situation has improved markedly. The budget deficit in just-ended fiscal 2013 was less than half its size at the recession’s deepest point in 2009. Under current law and using reasonable economic assumptions, the deficit will continue to narrow through mid-decade, causing the debt-to-GDP ratio to stabilize.
As part of any budget deal, lawmakers should reverse the sequester. The second year of budget sequestration will likely have greater consequences than the first, affecting many government programs in ways that nearly all agree are not desirable. A sizable share of the sequestration cuts to date has involved one-off adjustments, but future cuts will have to come from lasting reductions in operational budgets.
It would of course also be desirable for lawmakers to address the nation’s long-term fiscal challenges. Although the fiscal situation should be stable through the end of this decade, the long-term outlook remains disconcerting. If Congress does not make significant changes to the entitlement programs and tax code, rising healthcare costs and an aging population will swamp the budget in the 2020s and 2030s. Both cuts in government spending and increases in tax revenues will be necessary to reasonably solve these long-term fiscal problems.

And his conclusion:

Washington’s recent budget battles have been painful to watch and harmful to the economy. Political brinkmanship creates significant uncertainty and anxiety among consumers, businesses and investors, weighing on their willingness to spend, hire and invest.
Despite this, the economic recovery is more than four years old, and the private economy has made enormous strides. Business balance sheets are about as strong as they have ever been, the banking system is well capitalized, and households have significantly reduced their debt loads. The private economy is on the verge of stronger growth, more jobs and lower unemployment.
The key missing ingredient is Congress’ willingness to fund the government and make sure all its bills can be paid. If policymakers can find a way to do these things in the next few days, almost regardless of how awkward the process is, the still-fragile recovery will quickly become a self-sustaining expansion.
We are close to finally breaking free from the black hole of the Great Recession. All it takes is for Washington to come together.
emphasis added

A Republican advisor giving testimony to Congress, and telling Congress they are the problem. Ouch.

Zandi Testimony: Economy Poised for Growth, Congress must Fund the Government and Pay the Bills
Bill McBride
Fri, 11 Oct 2013 14:34:00 GMT

Can Obama be the Democratic Nixon on the Deficit

Republican conservatives are clearly not wanting to let the crisis of the deficit go to waste. I don’t trust them to reduce the deficit. They just want an excuse to drown the government in the bath tub as Grover Norquist once said.

However, I think writers like Paul Krugman who suggest we are in good place if we are close to where the debt to GDP ratio will be stable,  ignores three things in being so optimistic.  Jeffrey Sachs makes the same point.

First, it basically focuses on what level of deficit keeps debt to GDP constant. This assumes that the current debt to GDP level that we haven’t seen this high SINCE THE END OF WWII is what we find acceptable. The size of the debt level we have makes it harder to engage in fiscal stimulus to respond to any future recession.

Second, assuming interest rate eventually rise from their current level just that alone will substantially increase the deficit and the contribute to rising debt to GDP level.

Finally, even if we are coming close to an acceptable balance rising healthcare costs will continue to increase the deficit to a level to push federal debt to a steadily higher level. Health care reform may mitigate those healthcare costs, but only time will tell how much.

It’s true that there is no reason that the budget has to balanced. However, I think we should focus on a deficit level small enough that it slowly reduced the debt to GDP ratio, as we did after the second world war.

The best thing if for a democratic and liberal President like Obama to do this rather a Republican who just wants to slash the size of government for the fun of it.  Obama being a fiscal hawk also like Nixon going to China.  He’s in a better position to do because the skeptics of fiscal hawk ideas trust him.

Krugman Vs. Krugman Again

When you listen to this I think you hear from Krugman: We’re in a difficult situation because in the past, we didn’t care about the long-run and the need to push down the debt to gdp ratio. What we need to do now is run big deficits and let the long-run worry about itself. BUT ISN’T THAT WHAT WAS DONE IN THE PAST THAT COMPLICATES OUR CURRENT SITUATION?

Is the US at a Tipping Point?

Here’s more on the US federal debt, like I posted, and what might be a tipping point.  It’s disturbing that much of European crisis originated when southern Europe joined the currency union and had much lower borrowing costs. The lower borrowing costs in turn came from the having your credit worthyness bumped up by the belief that German and Northern Europe had their back. As it noted in the piece and its links low borrowing cost can make a deficit and large debt seem much more sustainable.  But once these nations started down that path, conditions changed sharply with the economic crisis in 2008.

The US is being helped in a big way by the flight of capital from the southern European nations like Greece.  But capital can flee quickly and if it does the sustainable US deficit could quickly become much less so.  Admittedly this story has been around for some years now and hasn’t happened yet, but it seems to me that getting onto a long-term path to a more sustainable us budget is critical.

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Growth of Federal Debt

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