Wednesday, April 15, 2009

Some More Observations On The Budget

Marty Sullivan is out with an insightful analysis of what the U.S. budget will really look like and what the implications for the future are (here and here). While the conclusions are not very surprising, there are some relevant phrasings.

[Obama's] budget is toast. Don't be fooled by statements that claim the "Obama budget" is moving through Congress. Ever since the Congressional Budget Office announced that Obama's plan would increase the national debt from 41 percent of GDP in 2008 to 82 percent in 2019, it became irrelevant.

In a March 26 news release, House Majority Leader Steny H. Hoyer, D-Md., led with this statement: "The Democratic budget resolution, passed out of committee yesterday, reaffirms President Obama's and the Democratic Congress' commitment to a long-term plan to restore fiscal responsibility." And on the House floor, House Speaker Nancy Pelosi, D-Calif., stretched the limits of credibility with this comment: "The Spratt proposal balances the budget."

On March 26 Office of Management and Budget Director Peter Orszag released a statement implying that because the congressional budget resolutions preserved the president's goal of "cutting the deficit we inherited in half before the end of the President's first term," those plans will "put our nation on a path of fiscal sustainability."

It seems that the only place you can get an honest assessment from a Democrat is in the Senate. There, Budget Committee Chair Kent Conrad, D-N.D., described the budget situation this way: "We are on a course that is unsustainable. I do believe that the five years of the budget mark of [the budget resolution] that I am laying down puts us on a much healthier trend line. But I in no way represent that my mark or the president's budget deals effectively with the long-term threat to this country."

Some of Martin's observations on the implication of the growing debt load:

  • More debt crowds out private capital formation
  • More debt hurts intergenerational equity
  • More debt increases the temptation for inflation
  • More debt reduces fiscal breathing room for future crises
Zero Hedge agrees particularly with the last point, which dovetails well with the theme of the Law of Unintended Consequences, which especially in times of crisis, should be a major consideration in any policy action.

Martin's gloomy conclusions:
Here's our prediction for the future. One or more of the following must happen: (1) taxes increase significantly; (2) entitlements are cut significantly; (3) economic growth exceeds anyone's wildest hopes and saves the day; or (4) the debt ratio continues to skyrocket, threatening inflation and financial turmoil.

How painful? Projections under the Senate plan would leave the debt-to-GDP percentage at about 60 percent at the end of 2010 (when, hopefully, the recession will have run its course) and at about 120 percent at the end of 2030. To keep the debt-to-GDP percentage at 60 percent (keeping the ratio of debt-to-GDP constant meets the economists' standard of sustainability), the government would have to cut spending or increase taxes to reduce the deficit by 2.7 percent of GDP each year. In 2009 that is $380 billion.

That means that if Congress approves the Senate budget and it wants to keep the debt-to-GDP level at 60 percent (far above historical averages), it must, starting in 2010, cut the deficit each year by an additional amount equivalent to $380 billion.

To give you a better feel for the difficulty, here are some options that could achieve this deficit reduction goal: (1) raise both the individual and corporate income taxes by 25 percent; (2) impose a broad-based 6 percent VAT; (3) cut defense spending by 55 percent; (4) cut Medicare spending by 90 percent; or (5) cut Social Security benefits by 60 percent.

All of the proposed realistic approaches to trimming the deficit will not be received with the same enthusiasm that Obama's ever more frequent TV appearances engender.

Deficits as a Percentage of GDP Under the Obama Budget And the House and Senate Budget Resolutions



Debt as a Percentage of GDP Under the House and Senate Budget Resolutions



Projections of Federal Debt as a Percentage of GDP Under Various Democratic Budget Proposals, 2008-2030

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22 comments:

Anonymous said...

Mother Jones Magazine asks if Geithner's bailout plan is illegal: http://www.motherjones.com/politics/2009/04/geithners-hedge-fund-bailout-illegal

Anonymous said...

There is a lot of bithching and moaning about the deficits, this blog included. But what's the alternative? Is REDUCED spending really a good way to go under the present circumstances? Is it really better that (i) the sick are without healthcare, the poor are out on the streets and there is no stimulus spending but (ii) the treasury has a healthier balance sheet? Is a healthy balance sheet only a means to some end or is it an end in itself?

Seems to me ZH is just happy to point out the costs of debt inflation, while the costs of doing otherwise are conveniently left out of the discussion.

Anonymous said...

SPY volume seems a tad light today with just 2 hours to go just 83m shares so far - actually that's a whole lot more than a tad by my reckoning -

Anonymous said...

nice dude, you are a little obama in the making. let's kill our economic future under the specter of some boogeyman alternative that may or may not happen. how about a massive deleveraging which would wipe out tons of equity holders, but equitize the bulk of debt and make this country actualy viable? this is not a discussion of which death is less painful - it is a question of how we turn the administration away from its horrendous course. leveraging more in a ZIR environment did miracles for Greenspan.

Anonymous said...

correction 135 million (still more than a tad)

Anonymous said...

.


The value of Truth - (The Fed's buying power + Congressional hoodwinks + Sheeple) = 0.

Don't fight the trend.

fourthestate said...
This comment has been removed by the author.
fourthestate said...

For the past century, any time there has been a multi-term GOP presidency there has been a major banking crisis to follow. Eisenhower is the exception. Correlation does not imply causation, but it's just an observation.

Peatey said...

ZH, re: your agreeing "particularly with [Martin's] last point," if the worst recession since the GD is not the time to "blow the fiscal wad," when is?

It strikes me that second-order mistakes of commission are always possible, often plausible, and sometimes probable, but first-order mistakes of omission are always certain.

Anonymous said...

The only way out is a world war.

Anonymous said...

The only way out is a world war.

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Yes, if Pakistan, China, and India kill each other in a nuclear war, that would destroy enough excess labor and capital to give us an economic boom.

Anonymous said...

Little Obama here...

I submit to you, Anonymous at 1:59, that Sweden-like tax regime is far less painful than your massive deleveraging program. I assume you will disagree, but that's probably because your ability to pay for housing and food is probably not threatened at the present time. This can change though.

LongOverdue said...

I think i'm going to pass out just reading this

LongOverdue said...

fourthestate said...
For the past century, any time there has been a multi-term GOP presidency there has been a major banking crisis to follow. Eisenhower is the exception. Correlation does not imply causation, but it's just an observation.

It's called economic cycle

Anonymous said...

These clowns will find themselves in the same situation FDR did in 37 and Japan found out the economy is now totaly dependent on government spending, every time attempts are made to raise taxes and cut that spending the economy will slide back into deflation.

Anonymous said...

These clowns will find themselves in the same situation FDR did in 37 and Japan found out the economy is now totaly dependent on government spending, every time attempts are made to raise taxes and cut that spending the economy will slide back into deflation.

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Gordon Brown will find out the same. There are many areas in the UK where over half workers are employed by the UK government. This strategy prevents economic growth.

Anonymous said...

nothing past 2016 is worth paying attention to anyway. who the fuck knows?

In Debt We Trust said...

Short treasuries. OTM puts on long dated treasury options - particularly the 30 year - should do the trick.

Steve From Virginia said...

A good example of both governance and structured finance being broken at the same time.

Right now the Treasury and the Fed have committed all resources to propping up the financial system. Good for them but what happens next? Where are the money (and money- like) flows going to come from?

Whose money will replace the taxpayers' in structured finance? Will there be a structured finance after another year of no flow of funds?

Another concern over the massive and growing debt load - can it be serviced in a high(er) interest rate climate? Will a rise in rates - or more Fed injections - precipitate a race for the exits (since there is obviously a lot more 'product' than there are paying customers for it.)

These are scary times and getting scarier.

fourthestate said...

Longoverdue- there are business cycles and financial system breakdowns. I don't think they are the same. 1907, 1929, 1987, and 2008 are massive breakdowns. Your argument does not seem to hold.

TraderMark said...

VAT it is!

Anonymous said...

i'll take "(3) cut defense spending by 55 percent" for $380 billion please Alex.