The US FY 2011 budget (published early 2010) was the first budget assembled by the Obama administration. It was based on data available in the fall of 2009.
TARP (approximately $700 billion, initially targeted at bank bailouts), had been passed by a Democratic Congress, and signed into law by President Bush in late 2008. The incoming Obama administration agreed with TARP.
ARRA (the approximately $780 billion "stimulus" program, aimed primarily at Main Street America) was passed and signed into law by President Obama in February 2009. The money from the stimulus program began trickling into the economy in late 2009, and began flowing into the economy at the planned rate in 2010. It will end in early 2011.
The budget was put together by teams of both academic and "real world" economists, all honest and competent men, I am sure. All of them are well schooled in the traditional idea that "the market" was suffering from a not atypical temporary malaise common to the functioning of our "market system". With a little assistance, it would soon right itself. At least that is what the budget forecast would have us believe they believed.
All these men were also pragmatic economists. Their employers were, ultimately, politicians who needed to be re-elected to carry out their economic and social programs. Forecasting is an uncertain business. In the absence of future, rare and unguaranteed catastrophes, the safest forecast is a forecast of a return to "normality" or "business as usual" after some brief hiatus caused by unusual circumstances.
Whatever the reason, that is precisely what the Obama budget projects. The FY 2011 budget is a well referenced, consistent, work. It shows a dip in economic growth in 2009, a rapid return to "normal growth" beginning in 2010 and back to trend growth in 2015. In the long term the budget reveals, correctly, that the biggest economic problem built into current legislation is the rapid growth in medical care expenses -- hence the urgency to pass the medical care legislation.
Unfortunately the short term budget projections, particularly about jobs, were too rosy. That much is now obvious. The stimulus program of early 2009 did create, and is continuing to create jobs which would otherwise have disappeared. But unemployment is higher than projected. The fiscal stimulus (ARRA) was probably only about one third of the amount necessary to sustain employment at painful but not catastrophic levels. Another stimulus program of perhaps twice the magnitude of the last one is probably now needed to alleviate the employment problem. But stimulus programs, no matter how large, on their own, will not cure the underlying diseases and restore BAU.
Because unemployment and the rate of mortgage foreclosures is so high, it is now easy to paint the original stimulus program (ARRA) as a failure, and a waste of taxpayer money. It did fail. It failed to function as advertised. It was too small. However the Democrats probably lacked the necessary votes to pass a larger program -- no Republicans in the House, and only three Republicans in the Senate voted for it. So Obama's team and the Democratic Congress probably did the best they thought they could.
The Republican line now is that any stimulus was a waste of taxpayers money. It was a failure, the same as all liberal tax and spend programs.
Meanwhile the unemployment problem is being exacerbated by bank bailouts. The Fed is bailing out banks to the tune of billions of dollars by a variety of mechanisms which do not need voter approval -- more on that subject in later posts. These bailouts keep bad debts on bank books. This failure of the administration to force banks to face and write off the bad debt problem prolongs the agony of consumers. Bad debts stay on bank books, bank profits are artificially inflated and bankers, aided by compliant auditors, loot their institutions, . Mark to myth continues to be the order of the day. Extend and pretend restarts the game of musical chairs.
And the Afghan war grinds on wasting yet more US treasure.
There is Democratic blood in the water, and the Republican-Corporate-Bankster coalition knows it. The message "the deficit is too big" and "the stimulus did nothing" has been well sold and resonates with the voters. Probably the only tactic left to the Democrats is to pass frequent, very small ($30billion or so) unemployment aid bills, while they paint the Republicans as heartless villains.
There are solutions to our problems, but they all involve a medley of creative legislation directed towards wealth re-distribution, bank reform, debt restructuring, energy conservation, and investments in new sustainable energy generation and transportation infrastructure. No American politician can get elected on such a platform!
The remainder of this post will be a brief introduction to deficits and growth as the Obama budget projects them. I will also have a few comments on the reasons for their probable inaccuracy.
__________
We have seen in a previous post that public borrowing (federal government deficits) is now in the region of $1.5trillion/year. Below are two charts from the FY 2011 budget, showing the connection between government receipts, government outlays, and the difference (the deficit) between the two. The chart data are taken from the Obama administration FY 2011 budget published in February 2010. The history goes through 2009. The forecast period covers 2010-2015
Chart 1 FY 2011 Budget Data
Chart 2. FY 2011 Budget Data
Clearly
My Answer:
The trick in item 4 above can only be performed if the rate of growth of GDP is relatively high. How high? The projected GDP growth rate and the recent history data are shown in Chart 3. You see what I mean by a rapid return to BAU. Even better: eyeballing the data, I would guess the 2001-2009 years average not much more than 1.5%, and eyeballing the next five years shows an average growth rate of about 4%.
Chart 3 FY 2011 Budget Data and History
Let's check for reasonableness:
In 2001-2008 US banks and consumers and businesses were borrowing like banshees -- an average of about $4trillion a year. Why? For the banks to a) borrow at low interest b) lend to mortgage consumers at a higher interest c) to sell the resulting mortgages to pension funds d) to bet against the pension fund e) rinse and repeat. Borrowing data is shown in Chart 4.
Despite all this artificial debt created growth, GDP growth remained anemic as shown in Chart 3..
Suddenly moving to a forecast real average annual growth rate of 4%, in the environment of a tight credit, high debt, high unemployment environment seems highly unlikely.
The chart below illustrates exactly how tight the credit market has become:
Total US Credit Market borrowing and the federal deficit (Federal Borrowing) is shown quarterly, annualized in Chart 4
Chart 4. Fed Flow of Funds Table D2
Clearly, from Chart 4
TARP (approximately $700 billion, initially targeted at bank bailouts), had been passed by a Democratic Congress, and signed into law by President Bush in late 2008. The incoming Obama administration agreed with TARP.
ARRA (the approximately $780 billion "stimulus" program, aimed primarily at Main Street America) was passed and signed into law by President Obama in February 2009. The money from the stimulus program began trickling into the economy in late 2009, and began flowing into the economy at the planned rate in 2010. It will end in early 2011.
The budget was put together by teams of both academic and "real world" economists, all honest and competent men, I am sure. All of them are well schooled in the traditional idea that "the market" was suffering from a not atypical temporary malaise common to the functioning of our "market system". With a little assistance, it would soon right itself. At least that is what the budget forecast would have us believe they believed.
All these men were also pragmatic economists. Their employers were, ultimately, politicians who needed to be re-elected to carry out their economic and social programs. Forecasting is an uncertain business. In the absence of future, rare and unguaranteed catastrophes, the safest forecast is a forecast of a return to "normality" or "business as usual" after some brief hiatus caused by unusual circumstances.
Whatever the reason, that is precisely what the Obama budget projects. The FY 2011 budget is a well referenced, consistent, work. It shows a dip in economic growth in 2009, a rapid return to "normal growth" beginning in 2010 and back to trend growth in 2015. In the long term the budget reveals, correctly, that the biggest economic problem built into current legislation is the rapid growth in medical care expenses -- hence the urgency to pass the medical care legislation.
Unfortunately the short term budget projections, particularly about jobs, were too rosy. That much is now obvious. The stimulus program of early 2009 did create, and is continuing to create jobs which would otherwise have disappeared. But unemployment is higher than projected. The fiscal stimulus (ARRA) was probably only about one third of the amount necessary to sustain employment at painful but not catastrophic levels. Another stimulus program of perhaps twice the magnitude of the last one is probably now needed to alleviate the employment problem. But stimulus programs, no matter how large, on their own, will not cure the underlying diseases and restore BAU.
Because unemployment and the rate of mortgage foreclosures is so high, it is now easy to paint the original stimulus program (ARRA) as a failure, and a waste of taxpayer money. It did fail. It failed to function as advertised. It was too small. However the Democrats probably lacked the necessary votes to pass a larger program -- no Republicans in the House, and only three Republicans in the Senate voted for it. So Obama's team and the Democratic Congress probably did the best they thought they could.
The Republican line now is that any stimulus was a waste of taxpayers money. It was a failure, the same as all liberal tax and spend programs.
Meanwhile the unemployment problem is being exacerbated by bank bailouts. The Fed is bailing out banks to the tune of billions of dollars by a variety of mechanisms which do not need voter approval -- more on that subject in later posts. These bailouts keep bad debts on bank books. This failure of the administration to force banks to face and write off the bad debt problem prolongs the agony of consumers. Bad debts stay on bank books, bank profits are artificially inflated and bankers, aided by compliant auditors, loot their institutions, . Mark to myth continues to be the order of the day. Extend and pretend restarts the game of musical chairs.
And the Afghan war grinds on wasting yet more US treasure.
There is Democratic blood in the water, and the Republican-Corporate-Bankster coalition knows it. The message "the deficit is too big" and "the stimulus did nothing" has been well sold and resonates with the voters. Probably the only tactic left to the Democrats is to pass frequent, very small ($30billion or so) unemployment aid bills, while they paint the Republicans as heartless villains.
There are solutions to our problems, but they all involve a medley of creative legislation directed towards wealth re-distribution, bank reform, debt restructuring, energy conservation, and investments in new sustainable energy generation and transportation infrastructure. No American politician can get elected on such a platform!
The remainder of this post will be a brief introduction to deficits and growth as the Obama budget projects them. I will also have a few comments on the reasons for their probable inaccuracy.
__________
We have seen in a previous post that public borrowing (federal government deficits) is now in the region of $1.5trillion/year. Below are two charts from the FY 2011 budget, showing the connection between government receipts, government outlays, and the difference (the deficit) between the two. The chart data are taken from the Obama administration FY 2011 budget published in February 2010. The history goes through 2009. The forecast period covers 2010-2015
Chart 1 FY 2011 Budget Data
Chart 2. FY 2011 Budget Data
Clearly
- Over a relatively long period, in the absence of a crisis, government receipts and outlays hover in the region of 18-22% of GDP. An eyeball average says a deficit of about -4% is "normal". As a reference, the EU rule for their countries is for the deficit to remain at less than -3% of GDP.
- In 2001 outlays began to increase (Bush war and medicare increases) and receipts began to decrease (Bush tax reductions for the wealthy, and a recession)
- In 2008-2009 receipts began to decrease sharply and outlays began to increase sharply due to the recession caused by the financial crisis and first the Bush and then Obama administrations' efforts to alleviate it. Receipts and outlays and thus the deficit fell well outside the norm. Outlays went to about 25% of GDP with receipts falling to about 15% of GDP creating a deficit of about -10% of GDP
- The Obama budget projects a rapid reduction of the deficit from about -10% of GDP to about -4% of GDP between 2010 and 2015. In other words back to BAU in about half a decade.
- The item 4 trick is performed by slowing the rate of growth of outlays with respect to the rate of growth of GDP, and increasing the rate of growth of receipts with respect to the rate of growth of GDP
My Answer:
The trick in item 4 above can only be performed if the rate of growth of GDP is relatively high. How high? The projected GDP growth rate and the recent history data are shown in Chart 3. You see what I mean by a rapid return to BAU. Even better: eyeballing the data, I would guess the 2001-2009 years average not much more than 1.5%, and eyeballing the next five years shows an average growth rate of about 4%.
Chart 3 FY 2011 Budget Data and History
Let's check for reasonableness:
In 2001-2008 US banks and consumers and businesses were borrowing like banshees -- an average of about $4trillion a year. Why? For the banks to a) borrow at low interest b) lend to mortgage consumers at a higher interest c) to sell the resulting mortgages to pension funds d) to bet against the pension fund e) rinse and repeat. Borrowing data is shown in Chart 4.
Despite all this artificial debt created growth, GDP growth remained anemic as shown in Chart 3..
Suddenly moving to a forecast real average annual growth rate of 4%, in the environment of a tight credit, high debt, high unemployment environment seems highly unlikely.
The chart below illustrates exactly how tight the credit market has become:
Total US Credit Market borrowing and the federal deficit (Federal Borrowing) is shown quarterly, annualized in Chart 4
Chart 4. Fed Flow of Funds Table D2
Clearly, from Chart 4
- Since the year 2004, Americans have been borrowing about $4trillion a year. This includes the $0.3trillion needed to finance the federal deficit.
- In mid 2007 credit problems surfaced in the US and the world, and the world credit system began to crash. In 2008 the federal government and the Federal Reserve (not shown here) sprang into action to save the credit industry
- In early 2009 credit, measured as a total, and exterior to the Federal Reserve, disappeared. The system was able to function because the Fed (unilaterally and secretly) took a number of radical steps (Quantitative Easing) to save the TBTF banks.
- The credit system is now functioning because the Federal government and the Fed is propping up the credit system with injections of about $1.5trillion a year from the federal government, and trillions more in loans, and purchases and guarantees from the Fed.
- According to the Obama budget (Chart 1 above) the federal government deficit is supposed to reduce to about $0.7billion and 4% of GDP in less than 5 years. Back to BAU in 5 years.
- In the absence of any more fiscal stimuli and debt write-off (nice word "restructuring!) there is no reason to believe that rapid growth (4%) will return. In fact, without increased government deficits even 2% growth is highly unlikely.
- Sufficiently large multi year fiscal stimuli targeted at appropriate infrastructure and other future productivity improvements (eg energy conservation) together with debt relief will be necessary to achieve even a consistent 2% annual GDP growth.
- Continuing with a plan to continue the deficit at about 10% of GDP for a few years while private debt is restructured is about the only way to get out of this mess
- Continuing stimulus money only for unemployment relief will relieve some misery, but will do little to solve the long term issues which have been ignored or exacerbated for about four decades.
- If GDP growth hovers in the region of about 2%, which I think is ambitious, employment will remain well above 7%
- If unemployment is greater than about 8%-9%, the gap between receipts and outlays will not close and the deficit will increase, and deflation is highly likely.
- Expecting future rapid growth (say greater than a consistent 3%) from any heavily indebted industrial country without curing the underlying problems is unrealistic. The situation in many EU countries is similar to that in the US. The UK is in even worse shape.
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