Some quick excerpts of what others are saying.
Paul Krugman (via Mark Thoma):
Long-term fiscal projections for the United States paint a grim picture. Unless there are major policy changes, expenditure will consistently grow faster than revenue, eventually leading to a debt crisis.
The three things people need to know about the deficit are:
- In the long term– after 2020– we get health care spending under control or else.
- In the medium term– between 2012 and 2020– we don’t have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn’t.
- In the short term– between now and 2012– our problem is not that our deficit is too large but that it is too small.
How can we reconcile the competing requirements of short-term support for the economy and longer term fiscal solvency? The challenge for policymakers is to formulate strategies for fiscal solvency– what we often call “exit strategies”– and communicate these strategies to the general public….
First, governments can reform their institutional fiscal framework to make it more likely that fiscal adjustment takes place when the time for action arrives….
Second, various reforms in health and pension entitlements, though politically not easy, can be undertaken without jeopardizing economic recovery.
On the topic there is also this from Robert Frank:
http://www.nytimes.com/2009/12/06/business/economy/06view.html?scp=2&sq=robert%20frank&st=Search
We have been hearing that long-term deficits will come under control since the Nixon administration. Only Clinton managed a surplus. DeLong’s credibility–as it rests on the government’s–is effectively zero.
Pay-go from 2012? What’s the deficit in 2012? 5%, 6% of GDP? DeLong’s proposing pay-go from a 5-6% deficit level? And what about the next oil shock? That can be budgeted for around 2012-2013.
Our deficit is too large. The government needs to focus on i) protecting the financial system from systemic risk (which, fingers crossed, appears to be working–although we need additional prudential regulation, in my opinion) and ii) providing support for the unemployed, including payments and health insurance. End of story. The rest of it, ‘Cash-for-Whatever’ simply doesn’t seem to make much long term difference. And it’s nice that the part of I-95 that I’ve driven recently–from Philadelphia to Boston–is immaculated repaved for a good bit of it, but goodness, who’s going to pay for that?
I think many of us who make up the core of the tax base are deeply concerned that tax increases, not in the hundreds of dollars, but in the several thousands of dollars, are heading our way, and that we as a country cannot honor our current commitments under SS and Medicare, much less take on new ones. We need to start hearing some realistic math from the administration.
I tend to think Dan Shaviro has the right idea about this one. You can and should enact reform as soon as possible that balances the budget on a long-term basis and, one way or another, eliminates the crushing structural deficits. But the timing of implementation is a separate issue – and most Economic thinking agrees that it would be a mistake to implement the spending cuts and tax rises necessary immediately given the fragility of the present environment.
You could even devise a kind of metric-based phase-in of these reforms – say – each percent of GDP growth gets you 10% further in the direction of the new balance.
But the point is, it would actually provide a great deal of extra political support – and maybe even a crucial amount more – for temporary additional fiscal stimulus policies if people had confidence today that they didn’t have to rely merely on hope and wishful thinking in their expectations as to whether national financial ruin will be avoided by prudent leadership in the future.
My sense is that there is a certain cynical wisdom that people have, and their instinct is that every additional dime of debt, prudently incurred or not, just gets us one step closer to disaster. Politicians proving themselves today – instead of appealing to the unlikely prospect of some illusory future environment of discipline and compromise – would go a long way towards setting a skeptical public’s mind at ease.
The economoists that I read, including those above, doggedly refuse to consider the possibility that reducing the U.S. trade deficit by action of the U.S. Congress will do more to restore jobs to the U.S. economy, at the moment, than additional liquidity which has been going to improve the financial health of banks and not to creating jobs.
I do not agree with the Paul Krugman drumbeat for more money to throw at the problem. Enough already. The recession-depression has reduced the U.S. goods trade deficit from 47% of U.S. goods imports in 2005 to 33% in the first 9 months of 2009. Legislation is needed to keep the ratio from creeping back up as the economy recovers. Reductions in the U.S. trade deficit will not translate into new jobs in the U.S. until investment decisions made in the U.S. become based on the conviction that Congress is committed to a trade policy that will shave an additional 9 percentage points off the 33% share and keep it off, regardless of economic growth.
Does ReformerRay believe trade barriers will reduce our trade deficit? I agree, it would aproach zero. Zero imports and zero exports.
If you believe in American-made automobiles, buy one. But let me make my own decisions, I don’t ned any help from congress.
The true FY2009 deficit was almost $2.1 trillion, including debt service and draw-downs from the Treasury supplementary financing account (money borrowed in FY08 and spent in FY09). That’s close to 15% of GDP, and nearly 100% of revenues (meaning the government spent very nearly twice what it earned). If that’s “too small”, I’d hate to see “big enough”.
DeLong: “In the medium term– between 2012 and 2020– we don’t have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn’t.”
Given the huge deficits projected for those years, this seems a pretty fatuous statement. It certainly would to our foreign creditors. What if the Latvian government stated that they would strictly adhere to a deficit of 5% of GDP or the next decade?
Nobody knows how this will play out. Was it a mistake to spend so much of the stimulus before before asset prices bottomed? Will there be another leg down next year? Or will the recovery be brisk in spite of all our worries?
The list of scenarios is endless, and so its impossible to know what impact the size of deficit will have. Therefor, it would be wise to take the problem seriously.
No matter what the situation five years from now, does anyone doubt Krugman will be as sure of himself then as he is now? His confidence in his opinions now has more to do with his personality than abilities.
Kevin M – All trade barriers are not equal. Tariffs by product would be a disaster.
Tariffs by country has some promise.
I am not willing to give up on the prossibility of improving the role of the U.S. in international trade until all the options have been explored.
It would also be helpful if economists made a point of distinguishing whether they are referring to the full deficit or just the primary deficit. It’s the primary deficit that we need to begin getting under control after 2012. The debt servicing costs will take care of itself if we first get the primary deficit under control beginning in 2012…or whenever the economy is robust enought to be weened off of the stimulus.
You are quoting 3 economists who are like the priests of the Middle Ages who gave the kings of that day intellectual cover to behave as selfish bastards with their divine rights.
These economists give our Pecksniffian politicians intellectual cover to be corrupt spendthrifts that they are.
One has to laugh at their pronouncements now that the likes of Obama & Pelosi will turn over a new leaf & ever reduce spending, as they must buy the next election.
PAYGO requires dollar-for-dollar offsets in revenues and expenditures over a 10-year horizon. Delong’s statement about the medium term makes perfect sense, since if PAYGO is followed, the absolute size of the medium-term deficit will be unaffected, resulting in a decrease in the deficit as a percentage of GDP (assuming a growth economy in the medium term). If the deficit as a percentage of GDP is reduced it will come back under control as a primary surplus is attained again (as had prevailed under every post WW2 president except Reagan and the Bushes).
Note that this says NOTHING about the absolute size of the government, PAYGO can be maintained by revenue increases in the general budget (from this historic low) as well as by slashing needed expenditures.
THIS is the second thing we need to worry about: RIGHT NOW we need to worry most about the short term and the danger of a double-dip recession, and the persistance of unacceptably high unemployment even if the jobless recovery continues without a double-dip.
I’d like to suggest it’s time to implement something Obama floated as an idea during the campaign: A federal capital budget. It is usually poor practice to incur debt for ongoing expenses, and often a good idea to invest in long-term capital improvements with positive cost-benefit ratio.
I also think the recent post on Calculated Risk showing the corresponding unemployment numbers for various GDP growth scenarios shows unacceptably high slack in the economy for the next several years under ANY probable growth path absent policy action. This time let’s try a stimulus that’s actually aimed at jobs for people and physical capital for the future.
The Main Street Bailout
1)BAILOUT STATE AND LOCAL GOVERNMENTS for 2010 and 2011. Package this with some form of rainy day fund payback enforcement triggered by good times.
2)Invest in the future labor force while reducing the size of the current labor force.
Condition aid to states on increased subsidies of JC and state university tuition and living expenses for students whose test scores show appropriate placement and whose GPA continues to shows serious study. Increase federal grant/loan program size and availability for students attending public schools (let private schools use their endowments to compete). These people won’t be working anyway, less use their time productively so they’ll have additional value when they do start working.
3)Given unemployment is heavily weighted towards construction and manufacturing jobs: Stimulate employment in both fields thru increased subsidy of durable goods (Energy Star appliances) purchases and home energy efficiency retrofits. All home sales to include a home energy audit.
MASSIVE publicity campaign focused on A)FREE MONEY, B)PATRIOTISM of reducing ENERGY USE while employing fellow Americans, C)Reduced ongoing utility costs and GHG emissions.
IRS Coupons for FREE CFL’s mailed to every home. $300 IRS coupon for a new ENERGY STAR refrigerator with turn-in of PRE-1993 fridge (20% of national inventory and about 2 years worth of annual industry sales). Have a WHILE SUPPLIES LAST clause for all of these related to durable goods.
50% refundable tax credit for installation of a gas supply and gas furnace (where gas is in neighborhood) or electric heat pump for those with electric resistive heat or fuel oil or modern wood stove in rural areas without air pollution problems and with a cost-effective supply of stovewood available . Cap $2500 higher for GHP. Roughly 20% of households have natural gas in the neighborhood (or even in the house) but use one of the above fuels. Everybody has electricity, and GHP will work in any climate even if air-source won’t. Why are we importing oil to burn at two-three times the cost of native natural gas? $100 per appliance tax credit for piping natural gas to dryers, water heaters, ovens/ranges. $100 per appliance coupon for purchase of gas appliances with turn-in of electric appliance. 50% tax credit for insulation and caulking. 50% tax credit for solar water heat where number of days of sunshine is above X (the south half of the country). Remainder of associated costs for above projects financed by utility with federally guaranteed funds for projects which will reduce monthly utility bills if amortized over 1/2 of equipment typical lifetime. Tax credit for aerodynamics mods (100% capped at X) for OTR semi-trailers, offset by small fuel tax increase phasing in starting in 2013.
This stuff should be paid for with a small BTU tax and larger petroleum fuel tax phasing in starting in about 2013.
Longer term: START heavy civil projects NOW. They need built whether they are part of stimulus or not. We are severely underinvested in physical capital over the past 30 years. Stop arguing about timeline and whether this will create any stimulus when we need it. We can always defer projects if unemployment should suddenly plummet to normal levels. OFF-ramp is a lot easier than ON-ramp when talking about projects with multi-year lead times. WHAT IF we do go into a double-dip recession and are looking at unemployment increasing thru 2013/4? We need to load our quivers for the 2012/2013 timefram in case we need continuing stimulus. If the economy comes back we simply spread the projects over a few extra years. A national EHV transmission grid is needed. Massive investment in railroad infrastructure is needed (and the current slowdown is the right time to do the work). The ASCE has a long list of projects to revamp obsolescent sewer, water, transportation, etc. infrastructure.
4)End the home-buyer tax credit. This is a horribly cost-inefficient program. In lieu of this program, mandatory modification of all home mortgages (unless they already meet the following): cap home mortgage interest on existing loans at 1% above prevailing mortgage rates, at 5% above Fed funds rate retroactive to Dec2007, and at 7% absolute whichever is lowest(unless cost of funds exceeds this level as determined on appeal to Treasury), cancel all mortgage penalties incurred from Dec 2007 to present, extend any past-due balance on Dec 2009 to back of loan. For any homeowner with a credit score over 720, the caps to be 0.5% lower. A moratorium on foreclosures for any homeowner who pays on time after Dec 2009 or who brings post-Dec 2009 payments current prior to foreclosure sale. Implement mandatory own-to-rent programs for those who are foreclosed on. Rent to be equal to 0.6% of current fair-market appraisal of property as determined by independent appraiser. Bank shall meet all landlord duties including maintenance. Own-to-rent to be subject to eviction laws of the state. Bank shall evict only for cause unless or until the vacancy rate in the local real estate market is below X % for Y months with Z months additional warning to tenant. The entire banking industry is on life-support from the American public. You don’t get to set your own rules when you are being propped up with 0% interest loans, billions in federal bailout funds, and trillions in federal guarantees.
4)This isn’t the Great Depression, but in some places it might as well be(30% U-3 in some places). Direct federal employment at minimum wage (in every county where the U-3 exceeds 15%) to the extent required to bring U-3 under 15%. These folks can do things like enroll their neighbors in food stamps (1/3rd of those eligible are not signed up nationally), relief programs, and energy efficiency stimulus; as well as cut firewood and clear brush in rural areas, plant trees, manage soil erosion, gather roadside trash, sort landfills for recyclables, etc.
5)Require, jointly design and pay for all reasonable costs of installation of methane digesters on all CAFO’s over a certain size, just as runoff retention is funded thru USDA now.
6)Sunset emissions credits faster to force electric generators to invest in pollution control now. Sunset OTC permits to force electric generators to invest in lower impact cooling tech now. I work for an electric utility, they can still borrow as much money as they need right now at excellent long term rates, and the long term benefit to the environment and economy, as well as the short term stimulus is not to be sneezed at.
7)Create Strategic and Economic Natural Gas reserve along lines of SPR. Natural gas is now close to 1/4 of our energy supply and subject to economy limiting price/supply volatility as well as natural disasters. Existing Storage is very limited. Strategic Storage to be by shutting in producing wells. This will prevent natural gas price from cratering to below replacement cost(it’s on its way), and incentivize drilling (which fell off a cliff a year ago, setting up the next fuel crisis a couple years down the road).
When reading the above fiscal deficit forecasts against actual, one may see Berkeley being very close.
A reading of the actual capital outlays and guaranties given P7
Losses on pension funds for those countries having over provided the futures in stocks markets P17 and P20
Outlook of the private finance P22 P25 published on March 6 2009 exhibits forecast of public debts that are already obsolete.
The primary deficits to be adjusted with declining fiscal revenues and at best steady unemployment at an average 10 Pct of the working force ?
Shall we call the accountants?
INTERNATIONAL MONETARY FUND
The State of Public Finances:
Outlook and Medium-Term Policies After the 2008 Crisis
Prepared by the Fiscal Affairs Department
In cooperation with other departments
Approved by Carlo Cottarelli
March 6, 2009
Contents
On the subject of the relation between the deficit, monetary stimulus and asset bubbles, Frederic Mishkin recently wrote that today’s bubbles lack any feedback loop and therefore aren’t very dangerous. I beg to differ.
The initial spike in deficit spending toward the end of FY08 was accompanied by massive buying of the dollar and Treasuries, as globally investors got out of risk assets and sought haven. Net foreign accumulation of Treasuries shot up to $565 billion, after averaging about $200 billion/year over the previous six fiscal years. That allowed the government to sell (net) just over $1 trillion of Treasuries in FY08.
Strong foreign demand continued in the first half of FY09, but then slowed considerably after March, after asset and commodity prices began to recover. Net foreign accumulation of Treasuries grew to almost $700 billion in FY09, but about two-thirds of that occurred in the first half, by the end of March 09. However, Treasury borrowing continued at full speed, as the emergency spending measures enacted during the peak of the crisis were followed up an explicit policy of extended, extreme fiscal stimulus. Net Treasury sales grew to almost $1.9 trillion in FY09.
That borrowing comes from three sources: abroad, pre-existing capital pools, and new money created by the Fed through monetary stimulus.
Borrowing from pre-existing pools of domestic capital drives up interest rates, which is considered the worst possible result by US authorities, and so is being avoided. Foreign borrowing is decreasingly available as the government continues policies that weaken the dollar. So US authorities are increasingly using monetary stimulus to support the fiscal deficit, which weakens the US dollar.
As foreigners become more averse to accumulating dollar holdings, Treasury is decreasingly able to fund itself with foreign borrowings, and thus relies increasingly on monetary stimulus, which further weakens the dollar. That is the feedback loop that is operating now and it is dangerous.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.5 trillion. What will happen when those assets are depleted? Today’s recession is the answer.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.
Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, its a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If youre interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Pete Murphy
Author, “Five Short Blasts”
In my opinion Brad DeLong describes the situation succinctly. According to the CBO’s August budget and economic outlook deficits will fall to 3.7% of GDP by 2012 and stay in the range of 3.1-3.4% 2013 through 2019. The public debt will surge to 65.5% of GDP by 2011 but therafter slowly accrete to 67.8% of GDP eight years later in 2019. PAYGO *is* all we really need in the medium term.
But in the short term trying to reduce deficits is a Hooverian strategy that is doomed to fail. And in the long term the cost of healthcare will determine if the future is somewhat bright or else some kind of disutopia where the whole economy revolves around healthcare.
I think he hit the nail on the head.
I find the commentary to be very vauge in terms of WHAT will be cut.
We all know what needs to be cut: middle class entitlements, particularly Medicare and Social Security.
Yet, here are the Democrats creating a new middle class entitlement with their so called health care reform.
People want to give Clinton credit for the surpluses during his tenure. But it was Republican Congressional austerity that created those surpluses.
Where are the calls for fiscal austerity today? Even Democrats are not of a mind to, say, eliminate George W Bush’s 2001 and 2003 tax cuts in their entirety. Or stop patching the AMT and make it a “deficit reduction surcharge” or some such thing.
No one seems to be serious, either on the spending or revenue side of things.
Buzz, cut it out. You take a Peterson Institute talking point and claim “we all know” that it’s true. Nope, one side of the debate thinks entitlement programs are “what needs to be cut”. The other side recognizes that we have a number of entitlement programs, some of which are reasonably well funded, others of which are not. And as long as we are lining up former presidents for credit or blame, let’s not forget which president lied about the cost of the Medicare drug benefit and threatened to fire anybody who revealed the lie.
The other side of the argument recognizes that we have a number of bloated subsidies, such as to corporate farmers and to home owners, which could be used to narrow the deficit. The other side of the debate recognizes that the biggest structural deterioration in the deficit outlook came from Bush-era tax cuts. The other side of the debate notices the huge size of US military outlays, relative to any other nation on earth, and wonders if that might not be a place to whittle down spending, before cutting back on transfers we, as a society, promised to retirees.
So let’s not pretend the assumptions of one side of the debate are something “everybody knows”.
“we don’t have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn’t.”
It boggles the mind that anyone can argue that we will stick to “paygo”?
kharris: So let’s not pretend the assumptions of one side of the debate are something “everybody knows”.
Whatever. Did you read the rest of my post, where I suggest rolling back the Bush tax cuts?
Democrats could very easily package a series of proposals along the lines you suggest and call it austerity. They could market it as defecit reduction and that everyone needs to make sacrifices to get the deficit under control. They could totally play the post-1994 Clinton playbook. I think it would have wide appeal and attract many of the Tea Party folks of an independent nature, which could be most of them.
But that’s not where the Obamaistas are going to go. It’s like Bill Clinton was never president.
Buzzcut: “We all know what needs to be cut: middle class entitlements, particularly Medicare and Social Security.”
Isn’t it injustice to bail out financial ‘services’ firms, which came in distress by acts of their own — it was not some sort of unforeseeable natural disaster — using taxpayers’ money, and then, to finance said bail outs, cutting social security?
If it needs be, then surely as last resort?
Bubblenanke, however, also wants SS cuts, as expressed last week at his reward for failure hearing:
“Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.
“It’s only mandatory until Congress says it’s not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation,” said Bernanke.
er by cutting expenditures or raising income taxes or other forms of taxes.”
“Willie Sutton robbed banks because that’s where the money is, as he put it,” Bernanke said. “The money in this case is in entitlements.”
http://www.huffingtonpost.com/2009/12/03/bernanke-channels-willie_n_378963.html
Instead,
let’s start with ending one of Bush’s tax cuts, and increasing the tax:
“The 2001 tax-cut law has scaled down the estate tax considerably. Under the current rules, only the largest 1 in 500 hundred estates pay any tax; that is, 99.8 percent of estates are passed on completely tax-free!!!
For the relatively few wealthy estates that are taxable, the tax applies only to the value of the estate that exceeds the exemption level of $3.5 million per individual or $7 million per couple.
Because of this and other tax breaks built into estate tax law, taxable estates owe less than 20 percent of their value in tax, on average. An individual can inherit, tax-free, a trust fund worth $3.5 million, or more than a middle-class family that makes $70,000 a year earns in a lifetime.”!!!
http://www.cbpp.org/cms/index.cfm?fa=view&id=3017
I’d also like to remind Bernanke and anyone else that has never seen a paycheck that me and my employers have been paying for my future entitlements(which I won’t see for a long time yet)my whole working career.
Me and my employers have also been paying on health insurance and I’ve never had a claim, making me one of those profitable customers that insurance companies like, but I’m getting to the age of potential unprofitably sometime here.
“Second, various reforms in health and pension entitlements, though politically not easy, can be undertaken without jeopardizing economic recovery.”
Pension entitlements – such as? Maybe not dangerous to economic recovery, but fatal for a political party.
“In the medium term– between 2012 and 2020– we don’t have a debt and deficit problem if congress sticks to PAYGO; we do if it doesn’t.”
We have a problem, even if congress sticks to PAYGO. Raising taxes on the rich to fund health reform is the perfect example. Mankiw has a good analogy – about an obese person who wants a piece of pie now, but promises to make up for it with future diet restrictions.