The Budget Deficit: More Questions than Answers
Last time we wrote here, two weeks ago, we spoke to the current state of the economy and whether it might truly be growing again or about to sink into another recessionary phase. We opted for the former, though with the usual economist's disclaimers.
Since then, we traveled to St. Louis, where we attended the annual meeting of the National Association for Business Economics "NABE", the main professional organization in our business. Can you imagine 300 economists in one room? That means, of course, that there were at least 400 opinions on the way things are going and why. Nearly all of the speakers, who included Lawrence Summers of the White House National Economic Council, two senior Federal Reserve officials and a number of private sector business economists, did seem to agree, though, that the recession has ended. But beyond that, there were plenty of notions about how quickly and strongly an outright recovery might proceed. Skeptics think we may be in for "a lost decade", such as the Japanese economy slogged through in the 1990s. Others noted that economists frequently underestimate the vigor of the rebound in business activity; they expect an early bounce and a sustained uptrend. We want to side with this second group, but there are, of course, numerous questions in this extraordinary period.
Today, we will talk about one of these questions, a big one, the size and role of the Federal Government, especially the hot-button issue of the deficit. The other mega-question from the NABE sessions concerns the structure and regulation of financial markets, and we'll go over that one with you too, hopefully next week. You're not hearing enough about that in the media or from Washington officials, but in the wake of all the mess of the last two years, it's important to get some of it untangled and straightened out if the economy is indeed to move ahead on a sustained upward track.
How Big Are Those Numbers?
This past Friday, the Treasury and the Office of Management and Budget (OMB) reported that the budget deficit for fiscal year 2009 came to $1,417,121,000,000. GDP in the fiscal year came to an estimated $14,116,000,000,000. Thus, the budget deficit represents just over 10% of the economy's output of goods and services for the year. This figure is not just the largest since 1945 (the last year of World War II), but the largest by a considerable margin; in fiscal year (FY) 1983, coming out of a steep recession, it was 6.0%; otherwise over the past 35 years, it has ranged from 2% to 5% of GDP, including surpluses from 1998 to 2001. Projections from OMB and the Congressional Budget Office through 2019 envision another 10% in FY2010 and then a gradual reduction to 3.2% through 2018. However, at that point, the deficit begins to widen anew as demographics push up outlays for retirement-age folks on Social Security, Medicare and similar programs. We'll come back to this point shortly.
How did this latest year's deficit get SO bad? The poor economy pulled down tax receipts and raised spending. Taxes fell 16% from $2.52 trillion to $2.10 trillion, with individual income taxes (what you and I pay) off 20%, corporate income taxes 36% and social security taxes 1%. Spending increased 18% from $2.98 trillion to $3.52 trillion; the biggest percentage gains were in housing finance programs, energy research and so-called "income security", which includes unemployment insurance. The biggest dollar gains included the housing and income security programs, plus social security, Medicaid and Medicare, followed by defense.
How Much Did the Stimulus Programs Add?
The stimulus programs, including the Bush Administration actions, contributed to the gaping deficit, but actually not as much as might be imagined. For instance, as we've already noted here, the American Recovery and Reinvestment Act, passed in February, is putting out funds at a moderate pace, still just above $100 billion. This should pick up quickly as projects get farther along in their bureaucratic processing. The special unemployment insurance for people who exhaust their regular allotment has so far amounted to "just" $6.5 billion. The TARP program for banks, which the Bush Administration pushed through late in its tenure, has seen capital investments of taxpayer funds into banks totaling $205 billion, but also repayments of $71 billion, for a net cost during this fiscal year of $134 billion. In July 2008, Congress also passed a housing finance assistance program, and it has laid out $96 billion. These four items that we can easily identify total $341 billion, just under one-quarter of the entire deficit. Other business cycle-related spending comes in regular unemployment insurance, added Medicaid outlays and probably even extra Social Security as some people might be encouraged to collect if they're eligible rather than hunt for a new job. Even apart from this special spending and the recession-generated weakness in receipts, the deficit would still be sizable; our quick calculations here would still leave us about $700 billion, that is, about half the actual total. And this is still big. The whole deficit in FY2008 was $455 billion, compared with an average from 1991 through 2008 of $160 billion.
The Deficit in the [Very] Short Run Is OK
Is this big deficit helping the economy or hurting it? The answer to this question is "Yes". In the short run, "deficit spending" is providing a support to the economy, but the longer run is a different question. At the NABE meeting, Lawrence Summers was quite clear in his pronouncement that "the stimulus is working". All of the above programs have indeed helped brake the recessionary forces. Others argue – and did so at the meeting – that since the economy and unemployment have been worse than the Obama Administration had forecast, the stimulus has failed. But we became convinced that these federal government initiatives prevented much worse conditions from overtaking us. And the quick actions of the Bush people last year helped stem the panic in financial markets. So these are positive developments – at least right now.
But The Deficit Stays Big and Gets Bigger
There's a problem, though, and you probably already know it. In the paragraph above, we guessed that about $700 billion of the FY2009 deficit is more fundamental than just fighting the recession. Indeed, long-term budget projections from the OMB point to $700 billion deficits out for the next eight or nine years. And then, as we noted, the deficit is likely to widen more, both in absolute size and also relative to GDP. This is tough, and out in St. Louis I heard bigger numbers than this from some economists who advise Democratic policymakers. The current health care plans only make this greater.
"We will go line-by-line through the budget and identify programs that are wasteful and could be dropped," candidate Obama promised. He's hardly the first to make such a pronouncement. This has not happened, of course, but we need to consider seriously just what we want government to be doing and the most equitable way to pay for it. Bear in mind the rubric, "if you tax something, you get less of it" so simply hiking taxes to try to close the gap will, over the long haul, bring less of whatever it the tax applies to. This could be self-defeating, then, as higher tax rates sap strength from the revenue sources. Additionally, current polls show that the elderly are opposed to the health care bills because they would cut Medicare. We may not have much choice, and as has been said for a number of years now, social security, Medicare and Medicaid all need to be rationalized in the face of the onrush of Baby Boomer retirees. How much defense can we afford? Well, we have to keep the country safe – that's the primary duty of the federal government – and this is a time when what that means is really complicated. There are no good answers at present, but we really need to ponder these questions in a comprehensive way and not be afraid to act on them.
A chapter of the book Mother Crafton and I are starting together will go over some of these issues. I have views I will lay out there. If you have views on what functions you think government should really concentrate on, please do write to us. The long-term health of the economy, our currency and our children hang in the balance.
Since then, we traveled to St. Louis, where we attended the annual meeting of the National Association for Business Economics "NABE", the main professional organization in our business. Can you imagine 300 economists in one room? That means, of course, that there were at least 400 opinions on the way things are going and why. Nearly all of the speakers, who included Lawrence Summers of the White House National Economic Council, two senior Federal Reserve officials and a number of private sector business economists, did seem to agree, though, that the recession has ended. But beyond that, there were plenty of notions about how quickly and strongly an outright recovery might proceed. Skeptics think we may be in for "a lost decade", such as the Japanese economy slogged through in the 1990s. Others noted that economists frequently underestimate the vigor of the rebound in business activity; they expect an early bounce and a sustained uptrend. We want to side with this second group, but there are, of course, numerous questions in this extraordinary period.
Today, we will talk about one of these questions, a big one, the size and role of the Federal Government, especially the hot-button issue of the deficit. The other mega-question from the NABE sessions concerns the structure and regulation of financial markets, and we'll go over that one with you too, hopefully next week. You're not hearing enough about that in the media or from Washington officials, but in the wake of all the mess of the last two years, it's important to get some of it untangled and straightened out if the economy is indeed to move ahead on a sustained upward track.
How Big Are Those Numbers?
This past Friday, the Treasury and the Office of Management and Budget (OMB) reported that the budget deficit for fiscal year 2009 came to $1,417,121,000,000. GDP in the fiscal year came to an estimated $14,116,000,000,000. Thus, the budget deficit represents just over 10% of the economy's output of goods and services for the year. This figure is not just the largest since 1945 (the last year of World War II), but the largest by a considerable margin; in fiscal year (FY) 1983, coming out of a steep recession, it was 6.0%; otherwise over the past 35 years, it has ranged from 2% to 5% of GDP, including surpluses from 1998 to 2001. Projections from OMB and the Congressional Budget Office through 2019 envision another 10% in FY2010 and then a gradual reduction to 3.2% through 2018. However, at that point, the deficit begins to widen anew as demographics push up outlays for retirement-age folks on Social Security, Medicare and similar programs. We'll come back to this point shortly.
How did this latest year's deficit get SO bad? The poor economy pulled down tax receipts and raised spending. Taxes fell 16% from $2.52 trillion to $2.10 trillion, with individual income taxes (what you and I pay) off 20%, corporate income taxes 36% and social security taxes 1%. Spending increased 18% from $2.98 trillion to $3.52 trillion; the biggest percentage gains were in housing finance programs, energy research and so-called "income security", which includes unemployment insurance. The biggest dollar gains included the housing and income security programs, plus social security, Medicaid and Medicare, followed by defense.
How Much Did the Stimulus Programs Add?
The stimulus programs, including the Bush Administration actions, contributed to the gaping deficit, but actually not as much as might be imagined. For instance, as we've already noted here, the American Recovery and Reinvestment Act, passed in February, is putting out funds at a moderate pace, still just above $100 billion. This should pick up quickly as projects get farther along in their bureaucratic processing. The special unemployment insurance for people who exhaust their regular allotment has so far amounted to "just" $6.5 billion. The TARP program for banks, which the Bush Administration pushed through late in its tenure, has seen capital investments of taxpayer funds into banks totaling $205 billion, but also repayments of $71 billion, for a net cost during this fiscal year of $134 billion. In July 2008, Congress also passed a housing finance assistance program, and it has laid out $96 billion. These four items that we can easily identify total $341 billion, just under one-quarter of the entire deficit. Other business cycle-related spending comes in regular unemployment insurance, added Medicaid outlays and probably even extra Social Security as some people might be encouraged to collect if they're eligible rather than hunt for a new job. Even apart from this special spending and the recession-generated weakness in receipts, the deficit would still be sizable; our quick calculations here would still leave us about $700 billion, that is, about half the actual total. And this is still big. The whole deficit in FY2008 was $455 billion, compared with an average from 1991 through 2008 of $160 billion.
The Deficit in the [Very] Short Run Is OK
Is this big deficit helping the economy or hurting it? The answer to this question is "Yes". In the short run, "deficit spending" is providing a support to the economy, but the longer run is a different question. At the NABE meeting, Lawrence Summers was quite clear in his pronouncement that "the stimulus is working". All of the above programs have indeed helped brake the recessionary forces. Others argue – and did so at the meeting – that since the economy and unemployment have been worse than the Obama Administration had forecast, the stimulus has failed. But we became convinced that these federal government initiatives prevented much worse conditions from overtaking us. And the quick actions of the Bush people last year helped stem the panic in financial markets. So these are positive developments – at least right now.
But The Deficit Stays Big and Gets Bigger
There's a problem, though, and you probably already know it. In the paragraph above, we guessed that about $700 billion of the FY2009 deficit is more fundamental than just fighting the recession. Indeed, long-term budget projections from the OMB point to $700 billion deficits out for the next eight or nine years. And then, as we noted, the deficit is likely to widen more, both in absolute size and also relative to GDP. This is tough, and out in St. Louis I heard bigger numbers than this from some economists who advise Democratic policymakers. The current health care plans only make this greater.
"We will go line-by-line through the budget and identify programs that are wasteful and could be dropped," candidate Obama promised. He's hardly the first to make such a pronouncement. This has not happened, of course, but we need to consider seriously just what we want government to be doing and the most equitable way to pay for it. Bear in mind the rubric, "if you tax something, you get less of it" so simply hiking taxes to try to close the gap will, over the long haul, bring less of whatever it the tax applies to. This could be self-defeating, then, as higher tax rates sap strength from the revenue sources. Additionally, current polls show that the elderly are opposed to the health care bills because they would cut Medicare. We may not have much choice, and as has been said for a number of years now, social security, Medicare and Medicaid all need to be rationalized in the face of the onrush of Baby Boomer retirees. How much defense can we afford? Well, we have to keep the country safe – that's the primary duty of the federal government – and this is a time when what that means is really complicated. There are no good answers at present, but we really need to ponder these questions in a comprehensive way and not be afraid to act on them.
A chapter of the book Mother Crafton and I are starting together will go over some of these issues. I have views I will lay out there. If you have views on what functions you think government should really concentrate on, please do write to us. The long-term health of the economy, our currency and our children hang in the balance.
Labels: Economy, Government Policies
posted by Carol S. | 10/20/2009 10:04:00 AM
4 Comments:
Does the Federal government also have a duty toward infratstructure -- like transportation, energy grid, etc?
Dear Anonymous,
It does indeed have such a duty -- right at the moment a not inconsiderable portion of the stimulus funds are going to such projects. It also does no good to build them if we don't help maintain them, but this is a function that gets pretty murky in the implementation.
Good point, then. Thanks for writing.
Carol
Here I am in the middle of Illinois, reading your thoughts, and knowing that many of us across this nation are on the same wave length, frustrated over the needs of the people and the arguments of the politicians. Nothing has a simple answer, does it? What I have learned after years of working in social services, part of that being 30 years as a psychotherapist, treating people across all socioeconomic categories, is this: we are our brother's keeper, and the biggest crime of our nation is the lack of adequate health care to all our people. The question seems to be: how do we manage this? Again, there is no easy answer. What I do believe is that until we can stop the vituperative attitudes and anger we will not come to a workable solution......Sigh from me too.
Dear Pat,
Thank you for your thoughtful comments. Health care is already a large part of federal outlays and our new plans would add a lot more. This is not an issue we like to respond to with "we just can't afford it". That sounds demeaning and guilt-imposing on the people who will benefit.
Infrastructure, which was mentioned above, and the environment, can be tackled with technology and "good old American ingenuity". But health care is another matter altogether. If we were doing it well, the question wouldn't arise or would provide its own answer.
This one takes, well, prayer, it seems. And as you state so well, it will also take a lot more patience and consideration for other people and for differing views than we've seen so far.
Thank you again, for reading the piece and writing back.
Carol
Post a Comment
<< Home