How big is $9 trillion?
"There’s been some hysteria about the administration’s new estimate
that the cumulative deficit will be $9 trillion over the next decade.
Don’t get me wrong: this is bad. But it’s being treated as an
inconceivable sum, far beyond anything that could possibly be handled.
And it isn’t.
What you have to bear in mind is that the economy — and hence the
federal tax base — is enormous, too. Right now GDP is around $14
trillion. If economic growth averages 2.5% a year, which has been the
norm, and inflation is 2% a year, which is the target (and which the
bond market seems to believe), GDP will be around $22 trillion a decade
from now. So we’re talking about adding debt that’s equal to around 40%
of GDP.
Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.
(There are some technical issues in comparing these various numbers —
gross debt versus net (mainly about Social Security) and overall
government debt versus federal, but they don’t change the basic
picture.)
Again, the debt outlook is bad. But we’re not looking at something
inconceivable, impossible to deal with; we’re looking at debt levels
that a number of advanced countries, the US included, have had in the
past, and dealt with."
$9 trillion-- what, me worry?
"August 28th
Paul Krugman may not be that concerned by the Obama administration's new projection that the unified federal budget deficits will sum to $9 trillion dollars over the next 10 years. But I am.
End of Hamilton
Here's the argument Paul Krugman gave for why $9 trillion maybe isn't as huge a sum as it sounds:
even if we do run these deficits, federal debt as a share of GDP will
be substantially less than it was at the end of World War II. It will
also be substantially less than, say, debt in several European countries
in the mid to late 1990s.
Political Math (hat tip: Russ Roberts) takes a closer look at Paul's first comparison:
Implicit in his observation is the concept that since we did fine after
WWII, we'll do fine now. But the years after WWII saw drastic reductions
in the inflation-adjusted debt driven by drastic reductions in
spending. Mr. Krugman points to no similar possibility in the post-Obama
world.... Back in 1945, at the height of the spending that saw our
national debt rise so dramatically, entitlement spending and interest on
the national debt made up a meager 5% of our total budget.
Source: Political Math.
And whereas in 1945 Americans could reasonably look ahead to a huge
decrease in military expenditures, in 2009 when I look ahead what I see
is a looming increase in federal medical expenditures.
I also believe it is relevant to compare these deficits not just with GDP but also with current federal tax revenues. $1 trillion is approximately the total personal income tax receipts of the federal
government in 2006. My preferred metric for what each additional
trillion dollars would require from me personally is to take what I paid
in federal income taxes in 2006 and double that amount. To pay off $9
trillion, I'd have to do that for 9 years.
Unfortunately, $9 trillion may not be the whole iceberg.
Diane Lim Rogers highlights the Concord Coalition estimate that current policy would imply a cumulative $14.4 trillion deficit over the next ten years.
You also can't ignore the off-balance sheet federal liabilities,
such as the $5 trillion in debt and loan guarantees from Fannie and
Freddie. A quarter trillion dollars worth of those loans we've
guaranteed are currently nonperforming. That's just Fannie and Freddie-- doesn't include FHA, FDIC, Federal Reserve,...
If the government tries to double taxes on people like me, it's in
real political trouble. If it doesn't try to double taxes on people
like me, it's in real solvency trouble.
It looks like we may have a problem here."
_________________
The burden of debt
"I respect Jim Hamilton a lot, so I take his criticism seriously — and he raises questions that others raise too about my relatively sanguine assessment of the debt situation. Yet I think that he and others are quite wrong, on several counts.
First off: the assertion that the post-World War II debt was sui generis, that it offers no guidance on what we can afford. It’s true that right after the war it was possible to get a drastic reduction in spending easily, since we didn’t have to fight the Axis any more. But let’s take a slightly later start date: in 1950, federal debt in the hands of the public was 80 percent of GDP, which is in the ballpark of what we’re looking at for 2019. By 1960 it was down to 46 percent — and I haven’t heard that anyone considered America a debt-crippled nation when JFK took office.
So how was that possible? Was it through drastic cuts in defense spending? On the contrary: we’re talking about the height of the Cold War (with a hot war in Korea along the way), and federal spending actually rose as a share of GDP. So yes, it wasn’t entitlement programs, but it wasn’t exactly discretionary either.
How, then, did America pay down its debt? Actually, it didn’t: federal debt rose from $219 billion in 1950 to $237 billion in 1960. But the economy grew, so the ratio of debt to GDP fell, and everything worked out fiscally.
Which brings me to a question a number of people have raised: maybe we can pay the interest, but what about repaying the principal? Jim gets scary numbers about the debt burden by assuming that we’ll have to pay off the debt in 10 years. But why would we have to do that? Again, the lesson of the 1950s — or, if you like, the lesson of Belgium and Italy, which brought their debt-GDP ratios down from early 90s levels — is that
you need to stabilize debt, not pay it off; economic growth will do the rest. In fact, I’d argue, all you really need to do is stabilize debt in real terms.
So where Jim Hamilton has us paying $1 trillion a year to service $9 trillion in debt, I have us paying $225 billion — 2.5% real interest on that sum.
Now, how does that compare with the tax base? Hamilton rather mysteriously compares debt service only with current personal income taxes. If we use the overall tax take, and talk about what that tax take will be a decade from now, things look much less severe.
So: in 2008, with revenues already depressed by the recession and housing bust, the federal government took in $2.5 trillion in revenues. If we assume 2.5% real growth* and 2% inflation, by 2019 that would rise to $4 trillion. So debt service costs due to the next decade’s deficits would be less than 6 percent of revenue under current law.
So, to review: to make the debt look scary, you have to dismiss the post-World -War II experience, even though it turns out that the 50s offer a quite good lesson; assume that in the future the federal government will have to amortize debt over a quite short period, even
though it never had to in the past; compare this inflated debt burden with a narrow piece of the federal tax base; and ignore the likely growth in the tax base over the next decade.
I’m not convinced.
*Contrary to what some think, we’d actually expect growth over the
next decade to be somewhat above trend, as the economy picks up some of
the current slack. That’s what the historical record tells us actually happens."
Invisible bond vigilantes
Back in 1993, James Carville — frustrated over the way fear of rising interest rates was crimping the Clinton agenda — declared,_____________________
I used to think if there was reincarnation, I wanted to
come back as the president or the pope or a .400 baseball hitter. But
now I want to come back as the bond market. You can intimidate
everybody.
Right now, however, the bond market seems notably unworried by
deficits. Long-term interest rates are low; inflation expectations are
contained (too well contained, actually, since higher expected inflation
would be helpful). No problem, right?
Alas, I’m getting the sense that the Obama administration is intimidated all the same. We’ve got the president telling Fox News
that he’s worried about a double-dip recession if he doesn’t reduce the
deficit soon — as opposed to the concern I and other have that he’ll
have a double dip if he doesn’t provide more support. (And why is Obama
talking to Fox News, btw?) And the buzz is that admin economic officials
are telling him that the bond market needs to be appeased, even though
rates are low.
This is truly amazing. It’s one thing to be intimidated by bond market vigilantes.
It’s another to be intimidated by the fear that bond market vigilantes
might show up one of these days, even though you’re currently able to
sell long-term bonds at an interest rate of less than 3.5%.
Yet that, according to rumors, is what’s happening.
Let’s hope the rumors are false. For we really need to be doing more
about employment — and the debt outlook isn’t that dire, at least by
comparison with past experience in advanced countries:
OECD, IMF
It would be a very, very bad thing if the administration is
intimidated into passivity in the face of an employment disaster — or,
worse, into neo-Hooverism — by the threat from invisible, and probably
imaginary, enforcers.
End of Krugman
My ending comment: I believe all Krugman's comments and numbers are accurate and valid. He is, however, depending on a (relatively) rapid return to "normal growth" with a stimulus of about $1.5trillion, to pull us out of the current recession/depression.
That is where he and I part company. I believe we are now so far down the road into unpayable private debt, continual criminal military adventures, continued criminal financial engineering, and world wide resource depletion that, without radical reforms in our military, corporate and banking systems, no amount of fiscal and monetary tinkering will solve the problems we have been facing for the last three decades. Nevertheless, throwing a trillion and a half bucks at the problem is a good thing .
I am convinced the solutions to our problems will not be acceptable to the current electorate our press and educational system has spawned.
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