Do our leaders know that the deficit is NOT unsustainable? [View all]

[cthulu2016]

Last edited Sun Mar 10, 2013, 05:36 PM - Edit history (8)

I really wonder. Does President Obama know that there isn't a deficit problem? Do Democrats in Congress? Do Republican leaders in congress?

We are not spending too much.
We are not taxing too little.
Our current policies are fine... or rather, they would be fine if we had a normal rate of GDP growth.

That part of our deficit/debt that is unsustainable (debt growth above rate of GDP growth) is currently caused only by the fact that the economy crashed circa 2008 and has grown only slowly since.

If we plug 2% inflation and 4% GDP growth into the CBO equations (meaning 2% real GDP growth on top of 2% inflation) we get a deficit growing at or below the rate the economy is growing. And that is a sustainable deficit in no need of cutting.

Because of inflation and growth we tend to view the defecit and debt relative to the whole economy. If we kept the debt the same and our economy doubled in size then our Debt/GDP ration would be cut in half. If our economy was cut in half then our debt/GDP would double. The sustainability of debt depends, in large part, on how fast your economy is growing.

Yes, at 1% growth going forward forever the deficit is unsustainable. True. But at 1% growth going forward forever the United States of America itself is unsustainable. At 1% the banking system is unsustainable, the housing market is unsustainable, employment and education and the freaking fire department is unsustainable.

If we assume the US will never recover from the crash of 2008 then the entire going concern we call America is unsustainable. In that scenario the deficit is the least of our worries!

And if we do expect to recover, in GDP growth terms, then there is nothing nuch wrong with our current laws and policies in deficit terms. With healthy but unextraordinary GDP growth we would be paying out less money (unemployent insurance, medicaid, food stamps) and taking in more money and the deficit would be growing slower than GDP, and a deficit growing slower than GDP is sustainable. (A literally balanced budget is a pointless and quite probably counter-productive goal. What matters is that the ratio of debt to the size of the economy not be growing.)

Our policy should be geared toward increasing GDP (and employment). That is the best way to fight a debt caused by low GDP and hgih unemployment.

The reason the deficit is unsustainable today is because of efforts to fight the deficit.

How could both sides have thought the stimulus in 2009 had to be balanced against the deficit... as if the two things were opposed rather than aligned? Are all our leaders just unable to take any problem seriously?

If the 2009 stimulus had been $2 trillion (my suggestion at the time) the deficit would probably be less of a problem today than it is. That huge magnitude of increased government spending would have been the fiscally responsible course in 2009... it was what an actual deficit hawk would have called for.

(The long-term deficit picture is a different matter, but that is entirely about healthcare costs and can only be solved with things pertaining directly to healthcare costs—most likely single-payer and the rationing of care that must attend single-payer.)

I do not expect people to believe that the deficit would disappear as a problem (as something growing faster than GDP) if all our policies stayed the same while GDP returned to normal, but it is true.

And don't take my word for it. Professor Krugman tries (for the umpteenth time) to explain it:

...it’s highly misleading just to focus on the raw deficit numbers (ONE TRILLION DOLLARS), for two reasons. First, fluctuations in the deficit tend to be driven by the business cycle; when the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget.

Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP.

So CBO is now out with its latest report on automatic stabilizers. It estimates that in fiscal 2013 these stabilizers will amount to $422 billion, accounting for just about half of a projected $845 billion deficit. So the cyclically adjusted deficit will be $423 billion.

How does this compare with the deficit consistent with fiscal sustainability? Well, there’s about $11.5 trillion in federal debt in the hands of the public. A reasonable, indeed fairly conservative guess is that nominal GDP will in future grow by 4 percent per year, half from real growth and half from inflation. This means that the sustainable deficit is 4 percent of $11.5 trillion, or $460 billion. Hey, we’re there!

...

http://krugman.blogs.nytimes.com/2013/03/09/gone-deficit-gone/