February 15, 2009
Projected size of the deficit
It's interesting that as we discuss the magnitude of the economic problems and proposed solutions, the units everything is quoted in have gone from billions to trillions.
Even before the stimulus bill, the Congressional Budget Office was estimating deficits for the unified federal budget of nearly $1,186 billion for 2009 and $703 billion for 2010. On Friday CBO estimated that the new stimulus package would add another $185 billion to the 2009 figure and $399 billion for 2010. That would put the deficit at almost $1.4 trillion, or 9.6% of total GDP for 2009 and $1.1 trillion (7.6% of GDP) for 2010. Our World War II deficits were three times this size (as a percentage of GDP), but nothing since then comes even close. The 2007 deficit, for example, was only 1.2% of GDP.
Recall that the government budget deficit is part of the accounting identity:
So, if the deficit increases as a fraction of GDP by 6% within two years, we're going to see adjustments in some combination of the other three terms of the same magnitude, that is, some combination of a plunge in private consumption, private investment, and net exports.
I take it as given that this is in part a policy response to a sharp drop in private consumption. From the point of view of the longer run objectives of policy, our goal should be to ensure that these higher rates of private saving persist and are used to fund an increase in investment and net exports, rather than finance an ongoing government budget deficit.
I grant that this is not a trivial thing to accomplish. Still, I wish I was hearing more consensus out of Washington that this is indeed the goal, and discussions of the best strategy for achieving it.
Posted by James Hamilton at February 15, 2009 01:04 PMdigg this | reddit
I have to ask myself if democrat voters even know how much money a trillion dollars is?
I understand it is easy to say I do not pay taxes and I have no skin in the game. Obama is going to pay my gas and rent!
So here ya go.
Our paper currency is .004 inches in thickness. It takes a stack of two hundred and fifty of those pristine perfectly flat bills to equal one inch in thickness. A stack of one hundred dollar bills one inch in thickness is equal to twenty five thousand dollars. A million dollars in one hundred dollar bills would be a stack forty inches tall.
Now imagine a stack of those new one hundred dollar bills one mile high. That's a lot of money, right? Well, a one mile high stack of one hundred dollar bills is only one billion five hundred and eighty four million dollars.
It would take a stack of new hundred dollar bills six hundred thirty one and one quarter miles, three hundred thirty feet and four inches tall to equal one trillion dollars. That would be ten and one half stacks of hundred dollar bills reaching from sea level to the edge of outer space. That's really hard to imagine.
Imagine it this way. If you laid that one trillion dollar stack of one hundred dollar bills on its side along the shoulder of an interstate highway it would take you over nine hours driving at seventy miles an hour to drive past it.
I still do not understand how the Government looting money from the private sector of the economy, aashing the Dollars though a Government who can not even count votes. Then returning it to who they choose is a good way to run a Country.
I think the RNC should hire a team of Constitutional Attorneys to look at the Pork and Spend Bill line by line. Then request a letter of resignation from everyone who took an oath to uphold the Constitution and voted for this turd.
Posted by: Dave Johnson at February 15, 2009 02:35 PM
I have read that the outstanding notional value of the derivatives market is over half a quadrillion dollars. I guess quintillion is the new quadrillion.
Posted by: Sue Greenwald at February 15, 2009 04:29 PM
Given the private savings was going to increase anyway (partly as a result of less credit being available to consumers and partly as a result of lower consumer confidence), there will be plenty of Americans willing to buy government debt directly or indirectly (via deposits at banks and money market funds). In addition, other countries are eager to sell their products here and acquire treasury bonds, so net exports will be falling as well.
The Federal Reserve is the lender of last resort. The U.S. Treasury has become the borrower of last resort. The stimulus is more helpful in providing highly rated debt to the market than the effects of tax cuts and government spending on total consumption.
In the end, the best way to increase the savings rate of Americans is to insure they get sufficient real return on their savings. This will result in lower investment, but the most productive investments will get preference and the overall balance of the economy will improve.
Posted by: Rajesh at February 15, 2009 04:32 PM
Purely in the sporting sense, I'll happily take the "under" on the deficit forecast in the graph for each and every year shown, but I'm especially eager to get the under wager on the out years showing a reduction in the deficit to less than 2% of GDP in the out years of approx. 2015-2019.
Since we're talking about the unified budget, absent meaningful reform I'm betting that the Medicare and Social Security projections are far too optimistic.
Posted by: Anarchus at February 15, 2009 04:51 PM
Dave Johnson, here is another way to imagine a trillion dollars: it is LESS than the amount of money Americans borrowed from their home equity in just two years (2004-2006) and spent.
I don't remember you, John McCain or any politician (Dem or Rep) complaining back then about these people "stealing" from future generations, even though the money appears to have spent on granite countertops, trips to Vegas and who knows what, none of which will have any value to their children.
Posted by: goodrich4bk at February 15, 2009 06:24 PM
BTW, Dave Johnson, I wasn't very happy about Republicans "looting money from the private sector" and spending it on wasteful military adventures that primarily benefited their big corporate and oil sponsors, but I never thought their poor judgment was a violation of their oath of office. What makes you think so?
Posted by: goodrich4bk at February 15, 2009 06:30 PM
Could this question be asked of Rethuglican voters?
Democrat has been used as a partisan insult in the past and maybe you don't know that.
Posted by: dilbert dogbert at February 15, 2009 07:37 PM
Professor Hamilton. - I am sure you know that the identity you quote needs restatement or qualification. The left side of the identity needs Consumption of fixed capital added to it to equal the right side. Even with that addition, the left side adds up to 1,738 billion in 2007 and the right side 1,885 billion.
Why do I quibble? Because I am using a series of assumptions to convert the identity into a causal model. I think Investment and Net Exports are the only independent and exogenous variables in that equation. The left side I see as determined by the numbers found on the right side. I deduce the size of Savings by subtracting Consumption (public and private) from Gross Domestic Product. This makes National Savings an endogeous variable in this equation. It also produces a number for savings in 2007 that is equal to Investment + Net Exports.
This is contrary to conventional practice but it is a useful and defensible series of assumptions.
Posted by: ReformerRay at February 15, 2009 07:43 PM
Reformer Ray:You can measure both investment and saving in a number of conceptually different ways, but there is always a definition for which the equation is true. For example, if gross investment is the magnitude you want to use on the right, then you need to use gross national saving (GDP less consumption and government spending) on the left; if net investment is on the right, you want net national saving (NNP - C - G) on the left. Yes, there are issues for how we treat state and local surpluses and government investment versus other government spending, and for that matter how you treat the statistical discrepancy between GDP and GDI, but there is always a corresponding definition of private saving for which the equation is most assuredly a true accounting identity. I am using the relation here to make a broader point that I hope is not getting lost.
Posted by: JDH at February 15, 2009 07:59 PM
I think a lot of it is just blocking and tackling, but right right now everybody is hoping that the duck is going to drop down and give them a hundred dollars.
Taxation: Enact a VAT, The US is the only G7 country without one. As it is charged on imports and rebated on exports, it captures some of the revenue lost by the off-shoring of production, and will discourage some importation.
Raise the gas tax by $2.00/gal. This will cut oil consumption, encourage the scraping of gas guzzlers, and encourage the sale of new fuel efficient vehicles. Use some of the proceeds to buy gas guzzlers and scrap them.
Make the "Bush Tax Cut" rates permanent. Lower the maximum rate on the estate tax to the same level as the income tax.
Make IRAs easier to use and less subject to restrictive rules.
Consumer credit: Require mortgages to have 20% down payment. Also make rules on income/price and income/piti mandatory.
Car loans should be limited to 60 months and require some equity so that they should not be "upside down" for more than a year or two.
Mass credit card solicitations should be banned. Credit cards should be secured by a deposit account. Otherwise stick to debit cards.
Repeal the Bankruptcy code amendments especially the ones requiring extended chapter 13 proceedings, and the ones disallowing discharge of student loans.
Education: Do not make student loans easier. We are creating a generation of partially educated debt slaves. Spend the money on making college credit more widely and cheaply available. We have not yet really begun to use all of the new communications and information technology to educate people. Why are we still holding live lectures? Why?
Housing: Fix the chaos caused by the subprime fiasco. If homeowners cannot afford their mortgage, let them turn in the keys and a deed, and pick up some moving expenses (if they deliver the place in good condition), or if they want to stay let them have a lease on the place at a fair market rent based on the appraised value of the house. If they want to gut it out, give them mortgages with a five year fixed interest only period converting to 25 year fixed rate at the end of the five years. At 6% io would be $2500/mo and 25 year amortization would be $3222/mo. Speed is the real issue not mathematical exactness.
Social security: Raise retirement ages. no more social security at 62. Decrease benefits by making all SS payments income taxable. Also fine tune inflation adjustments so that they do not over adjust. Allow people to purchase supplementary benefits, and to deposit tax refunds, savings bonds and IRAs into social security to pay for them.
Medicare is part of the festering health care system problem. The real trick will be be to hold prices down, not to throw more money into the system that already consumes 17% of the GDP.
None of these ideas will cure this depression. But then again, neither will the stimulus bill, and they won't make the deficit soar.
Posted by: Fat Man at February 15, 2009 08:44 PM
The current situation would have looked a lot better if we hadn't burned up a $1 trillion in Iraq and if the Bush tax cuts of 2001 had been temporary stimulus instead of semi-permanent. We are starting from a very deep hole.
Posted by: Joseph at February 15, 2009 09:39 PM
Dave Johnson, if you laid the 3 million new job holders from the stimulus bill on their side along the shoulder of an interstate highway it would take you from New York to Los Angeles. Am I playing that game right?
Posted by: Joseph at February 15, 2009 09:50 PM
you are not taking into account the 'borrowing' from excess social security taxation which amounts to 1.5-2% additional deficit spending. the money has to be returned, yet none of the fiscal policies give even a slight hint how. expect a monetary resolution.
Posted by: baychev at February 15, 2009 10:28 PM
If I am doing the math correctly, a govt surplus = a negative govt deficit. Adding govt deficit to both sides yields: private savings = govt deficit + investment + net exports. But exports are a tricky subject. Under a gold standard, a trade deficit was bad because it gave up claims to our gold reserve. But what does it mean under a floating rate policy? I would rather enjoy an HDTV while I am alive than die with $2000 in the bank. And a poor Chinese worker would rather have a job making an HDTV for dollars than being unemployed.
My conclusion: Govt deficts add to private sector savings as long as they exceed the trade deficit. And with suffient financial backing (savings which = govt debt) the private sector will INVEST in new production, housing, etc. Investment creates its own savings.
BTW, a trillion is so small my (foriegn made) Ipod holds many many trillion data bits.
Posted by: markg at February 16, 2009 06:38 AM
Another consideration is no one has disclosed how much it will cost to implement all these programs. I have heard one estimate that over and above the $780B just approved implementation will be an additional $2.5 trillion. If we add everything that has been spent on Keynesian stimulus over the past three years we are near $15 trillion.
At one time I was complaining because our bailout was almost half of annual GDP. It now appears that the total of the Bush/Obama bailouts will be $3 trillion more than our annual GDP. For all those people saying the bailout is not big enough, just how many years of GDP should we spend on this insane idea?
The US is one of the most unusual nations in history. We were the first country to burn food for fuel and now I think we are the first country where the government spends more that the total annual income of the nation. Unbelievable!
Posted by: DickF at February 16, 2009 08:05 AM
I lifted this part from Mark Steyn.
America has a choice: It can reacquaint itself with socioeconomic reality, or it can buckle its mandatory seatbelt for the same decline most of the rest of the West embraced a couple of generations back. In 1897, troops from the greatest empire the world had ever seen marched down Londonís mall for Queen Victoriaís diamond jubilee. Seventy years later, Britain had government health care, a government-owned car industry, massive government housing, and it was a shriveled high-unemployment socialist basket-case living off the dwindling cultural capital of its glorious past. In 1945, America emerged from the Second World War as the preeminent power on earth. Seventy years later . . .
Should Republicans resign over Iraq? If we are going to continue to allow aging Hippies to control our energy policy and NOT drill for the vast oceans of oil we have here, not building Nuke Power Plants, Not use Natural Gas or Bio-Diesel and not build additional Refineries. We will have wars such as Iraq to get the needed energy to drive our economy. Yes, it is that simple.
I have been investing in alternative energy sense 1997 and can tell you we are not even close.
How much is Obama spending to produce each one of these jobs? In 1940 FDR was sitting at 15% un-employment. The model FDR used did not work.
As far as President Bush. I am not a fan. I am a Conservative and not a Republican. I have never voted for a democrat in my life.
I will tell you between Hillary, McCain and Obama. Hillary would have been the best President.
Bush along with many others in our Government had taken a Constitutional oath which they Neglected.
Look to illegal immigration and our Borders for one example. If you would like Government resignations then look here.
The war in Iraq is hated by dems. Go to Google and search democrat Iraq Quotes. You might be surprised at what you read. Also remember 8 years of sniveling by Clinton and dems over Saddam holding power after first Gulf War.
We will be fighting wars as we are in the Middle East because energy drives our economy. Under Obamaís lack of leadership.
Investors must look at $200. + per Barrel of oil cost which would kill any economic recovery in itís tracks.
If you take the time to look at Bush and the last bunch of Republicans in Government you will find them to be way to the left side of JFK.
I do not understand the dems problems with Republicans seeing how I hear JFK quotes at every turn in an election cycle by dems.
JFK could not get elect today because he would be seen by his own party as way to conservative. See JFK on taxes, illegal immigration, States Rights, US Military action.
Posted by: Dave Johnson at February 16, 2009 08:32 AM
I have a question for James Hamilton. How if at all would his argument about savings and investment change if we count education spending (particularly at the post graduate level) as investment. He refers to "investment in plant and equipment." But isn't human capital investment a major determinant of productivity? Are our measures of consumption therefore too high?
Posted by: larry hirschhorn at February 16, 2009 09:09 AM
dave johnson, it's obvious that you haven't the slightest idea what you're talking about in any detail, but let me give you one example of a democrat knowing what $1T is: it's the rough cost to date of our splendid little adventure in iraq, for which no republican thought any program should be cut or any tax raised.
so unless you can prove that you opposed paying for iraq through borrowing, that alone is a basis for you to stfu.
Posted by: howard at February 16, 2009 09:51 AM
Joseph and Howard-
You will notice that during the Iraq war (which we won despite the Democrats) the deficit as a percentage of GDP never cracked 4% and was heading toward zero before the recent financial unpleasantness.
Anarchus - I agree with you that the idea that deficits will suddenly drop back down to 2% of GDP or less is pretty comical. How many of these programs will be one-shot deals?
Posted by: Rich Berger at February 16, 2009 10:26 AM
rich, i will notice no such thing, for three reasons: a.) we were in a period of growth. there was no excuse to run a deficit at all; b.) what matters is the general fund deficit, which was, of course, worse than the unified deficit that you want to point to; c.) the reasons that the "deficit" was heading towards zero were that iraq spending doesn't count (it's always been emergency appropriation) and that the projection assumption was that the bush/gop tax cuts would expire on schedule.
so, a misleading and non-responsive answer, rich.
Posted by: howard at February 16, 2009 10:35 AM
You need to watch both segments.
Posted by: Fat Man at February 16, 2009 11:09 AM
Prof. Hamilton - I appreciate you taking the time yesterday to point out that the identity you reference refers to Net Private Investment. I now see that your words under the equation make that point explicit. The numbers for the identity are 235 billion on the left and 299 billion on the right, which is certainly close enough.
The issue of the direction of causation remains, however. Your position is the same as Paul Krugman in his old text I use as reference (1994).
The direction of causation is a very important issue but it is seldom discussed explicitly.
Posted by: ReformerRay at February 16, 2009 01:36 PM
With out energy there is no economy. You have to choose. Drill for our own oil or fight wars to keep energy flowing.
If Obama were to see the light and cut spending by Government. How would he do it? Most Government spending is mandatory and written into law. A President can not start cutting when 80% plus is non-discresionary.
As I have posted numerous times. There are already proven models to fix economies. Also proven time after time is the fact that lower tax rates increase revenue to the Government. See JFK and Reagan.
I pay 42 cents of every dollar I make to one tax or another. My State is soon to raise sales tax from 7.75 to 9.75 percent and our State fuel tax will go from 18.9 cents to 33.9 cents per gallon plus the 18 cents federal tax totaled then times by 9.75 percent.
This is crazy.
It is impossible to remove this much money from the private sector and have a growing economy. FDR, Carter, Europe, Russia and Germany have proven this system of Government does not function.
If given a choice between dealing with our Government or Mobsters. I would choose the Mobsters.
Government has proven they can not count votes, create viable ponzi schemes such as SSI, Medical, Welfare, IRS and on and on we could go.
The Government has proven they can not run the Banking System. See Barney Frank, Chris Dodd, Consumer Re-Development Act.
The Government has proven they can not regulate Wall Street. See Glass Stigal or Burney Madoff (who is better then our Government at ponzi schemes).
Obama just took 2 Billion Dollars for a Citizen Police Force being Modern Day Brown Shirts with ACORN. The next move is to turn the Military over to the UN in some way to remove guns. Our Military will not fire on its own people. Another Country if sent here by the UN will.
How long before Obama removes free speech from our air waves? Well at least the GOP side of speech. He will continue to own CNN,ABC,CBS,ABC,CNBC,MSNBC and most of the News Papers. Fairness will not apply on the DNC side of the so called fairness issue.
Posted by: Dave Johnson at February 16, 2009 01:41 PM
Reformer Ray: You're quite right that causation is important. If we grant that the government can choose to make the deficit bigger, then one of the other three terms must adjust in response. It's possible, a you suggest, that an increase in the government deficit causes an increase in private saving which would not have happened without the increase in the government deficit. However, I believe that what we observed in this instance was that private saving increased first, and the government's response was that we needed to increase the deficit. That's the kind of thing that's inconsistent with what I believe should be our long-run objectives and strategy here.
Posted by: JDH at February 16, 2009 02:11 PM
@Joseph: "3 million new job holders"... WHAT? No one has said word one saying that the stimulus would create any certain number of new jobs. I challenge you to point to a single instance where anyone of authority said the stimulus package would create jobs.
The "create or save" weasel wording doesn't count -- that is so vague that it basically means as long as we have more than 3 million job holders in the US, the stimulus has accomplished its goals.
Posted by: teh at February 16, 2009 02:51 PM
James Hamilton, when George bush lied and took us to war, we know from common sense, that it was going to be expensive.
Estimated at a min of 10 billion a month, that's a hundred and twenty big ones anually. Considering that the war was bogus, where you concerned then that we would be spending that much money on foolishness?
Posted by: zena at February 16, 2009 02:59 PM
First off, there's never been any evidence that Bush lied, just crazy conspiracy stories. The possibility that all of the intelligence agencies of all of the civilized nations of the world conspired together is so vanishingly small that it's not worth considering.
Secondly, this is not "Bush's War" - Democrats overwhelmingly voted in support of going to war and funding said war, just as did the Republicans.
Posted by: teh at February 16, 2009 03:44 PM
Howard - After dave johnson lists a page of details you tell him he hasn't the slightest idea what he is talking about in any detail? What did I miss?
By the way, providing defense is in the constitution and one of the legitimate purposes of government spending. So having to be opposed to borrowing for defense is a canard and that alone is a basis for you to stfu.
Posted by: Dean at February 16, 2009 04:15 PM
I am going to crush the Socialists right here and now.
As far as Obama creating 4 million new jobs then saying he is going to create AND SAVE 4 million jobs after spending $475,000 per job is it?
Here is your quote........We have tried spending money. We are spending more than we have ever spent before and it does not work ... After eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!
Treasury Secretary under FDR, after 2 terms of FDR's "New Deal". http://rebirthofreason.com/Spirit/Quotes/Author_713.shtml
Posted by: Dave Johnson at February 16, 2009 04:56 PM
You must be kidding me. The cost of the war was included in the budget. If the Bush tax cuts were extended I wouldn't have expected revenues to decrease - that would simply mean tax rates would continue as is.
Posted by: Rich Berger at February 16, 2009 05:49 PM
Rich Berger: The cost of the war was not included in the standard appropriations process and hence budget projections, as you may recall from this post which you commented on. It is true that those costs were included in the CBO tabulations.
Posted by: Menzie Chinn at February 16, 2009 08:12 PM
In terms of long-run objectives, we won't be able to use increased domestic consumption as reason d'etre for increasing investment. This makes increasing exports even more important. I fear that this is something that this is easier said then done. Even if we get a Washington consensus.
As a request, is there any way that you or Menzie could discuss the articles by Richard Cooper and Martin Feldstein the appeared in the Summer 2008 edition of the Journal of Economic Perspectives.
The title of Cooper and Feldstein's articles are, respectively, "Global Imbalances: Globalization, Demography and Sustainability," and "Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate."
Posted by: smg at February 16, 2009 08:27 PM
Since the graph showed historical budgets prior to 2009, I just wanted to point out that H & J's comments were nonsense.
Posted by: Rich Berger at February 17, 2009 05:05 AM
New to this site. Good information.
The real salient issue is the impact of the deficit on the debt Over 8 years, Bush increased the real debt (not gross) by ~2.4 trillion. While that number seems extremely high, the real debt as a % GDP ended up relatively average 37%. What most have missed...after being spoiled with surpluses and with all the politically motivated bashing...is that most of the "huge" deficits run by Bush were reality small in terms of increasing burden. GDP growth (inflation + real growth) occurred at a high enough rate to render the deficits relatively non-eventful. It went from 33% to 37%. In fact, in 2006 and 2007, real debt burden as %GDP actually dropped because the deficits were smaller than GDP growth. Spending got under control.
The problem now is that we're about to get hit twice. In just two years of Obama, the real debt is project to go up as much or more than Bush's did over 8 years...AND the GDP is going to grow much slower. At the end of two years, our real debt will be ~7.9 trillion and GDP will be ~15 trillion. Debt burden will be at 53% of GDP...and growing at a significant pace.
That will be THE problem. We'll be back to the early 1990s. Then we're at the mercy of interest rates.....and moving back to net interest being 15% of the budget. Ouch.
Posted by: bruce at February 17, 2009 12:18 PM
I take from bruce's post, just above, that the consequences of events in the past 8 years are not all yet actualities. Habits of ignoring the government budget deficit added to destruction of ability to produce goods and services in the U.S. added to the inability of the finance sector to add profits by selling to each other - together place us in a real bind.
During the period from 1989 to 1997, the U.S. economy seemed able to survive with free trade. The goods trade deficit was small and not growing excessively. And manufacturing employment actually increased in the middle of the nineties. But overseas producers were learning. When the recession hit in 2001, they were ready to reap the rewards of learning how to serve the U.S. market. The goods trade deficit went from .23 of goods imports to .41 of goods imports between 1997 and 2002. The share of domestic corporate profits generated by the manufacturing sector went from 30% in 1997 to 8% in 2002.
This country is unable to look ahead. Our political system does not encourage it. Apparently, academics, which should provide that forward look, are not attuned to that need.
Posted by: ReformerRay at February 17, 2009 06:30 PM
Ray....I think the consequences of government spending and such over the past 8 years is already baked into the situation. There is no other shoe to drop. IMO a lot of the criticisms of the past 8 years were really bogus, caused by measuring it by set points created during the boom. For example, unemployment of 5% was called horrendous...because we had been spoiled. 5% now looks awesome.
We ALL are responsible for putting ourselves in this situation. We abused some of the mechanisms that enabled prosperity over the past 25 years..leveraging, securitization, increased valuation, etc. We got cocky with the mentality that wealth was never ending, so for example we believed everyone could (and should) own a home. We convinced ourselves there was little economic risk, and it has now come crashing down. We all believed it and backed the moves by the politicians to act accordingly. Their fault?
I also don't believe we are somehow ruined because of globalization. Another view of the situation is that we just brought one third of the world into the global system...China and India. Sure, we lost some base during the transition because they had an advantage, but their advantages are diminishing as they hit natural growth roadblocks. We will continue to move forward as they slow down, with more and more $$ moving the other way. We've already seen that with Indian call centers for example.
The problem I have is the current recession is going to force us into a REAL fiscal bind (not a politically contrived one like the past 8 years), and the last thing we need to do is not be frugal. It seems the mentality of our new leaders is spend spend spend, even as our situation truly deteriorates.
I agree with the last comment. The intelligensia of the country are too busy trying to stop the military-industrial complex (redefined by them as any corp interest), led by the evil Reps, from ruining the world. That's all they really care about...and they'll take the US down to save the world. They have no interest in creating long term US prosperity. We're the problem.
Posted by: bruce at February 20, 2009 02:13 PM