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Old 05-27-2011, 07:32 AM   #81
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Count me in the mainstream. The rationale for balancing the budget is a naive analogy between household and government finance, with no real evidence behind it, and is just being used as an excuse to reduce programs which benefit our society's less fortunate.
I do hope you are right. If we can just keep borrowing and printing forever with no negative implications it would be great. I think we'll try it and time will tell how it works out. Certainly any politician who cuts anything will face a bunch of ticked off voters and lobbyists from powerful companies and Unions. They have a major incentive to keep spending money we don't have. I just hope Dick Chenney was right and deficits don't matter. I can't help but think they do- it just takes a while before it can't go on anymore.
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Old 05-27-2011, 07:46 AM   #82
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If we can just keep borrowing and printing forever with no negative implications it would be great. I think we'll try it and time will tell how it works out.
I'm not so pessimistic. Our budget problems aren't that large. Sure the numbers are big, but we have a big economy too. Reasonable people could put us back on sound footing in an afternoon . . . and do it in a way that doesn't jeopardize our fragile recovery. The problem is we keep electing people who are increasingly unreasonable. Compromise has become a dirty word in some quarters. It's really unfortunate. And yet . . .

Clyburn Predicts Last-Minute Debt Deal to Cut $6 Trillion
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Old 05-27-2011, 08:28 AM   #83
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Oh, and for those who are interested in just how much the credit markets are demanding austerity, here is how much benefit the UK is getting . . .
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Old 05-27-2011, 08:59 AM   #84
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Oh, and for those who are interested in just how much the credit markets are demanding austerity, here is how much benefit the UK is getting . . .
Austerity measures take a while to work in their effect on a country's ability to borrow and its debt rating. Unfortunately, the eventual positive effect of such macroeconomic factors doesn't mean much to the average person who only sees the immediate impact of losing government benefits and jobs formerly created by government spending.
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Old 05-27-2011, 09:19 AM   #85
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Of course there are limits. There are limits to everything. But just because two things share a characteristic that is true of everything, doesn't make them similar in any meaningful way.

The problem with the 'family budget' analogy is that it is designed to take something everyone is familiar with and use it to guide them to several wrong conclusions: 1) That debt borrowed needs to be repaid - it does not 2) That we have to run surpluses to lower our debt burden - we do not ...
Can you expand on the caveat in your earlier #6 then? I think that is key to this:


6) Governments can generally run fiscal deficits every year and still improve their fiscal position (as long as the primary deficit is smaller than the real growth rate less than real interest rate on its borrowing)


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3) That 'belt tightening' is the only way to improve our fiscal position - it is not

4) That cutting spending during an economic downturn is good economic policy - it is not.
Cutting wasteful spending is needed, and increasing revenues are options. Provide a stable, positive environment for business to help with that.

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Old 05-27-2011, 10:01 AM   #86
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Austerity measures take a while to work in their effect on a country's ability to borrow and its debt rating.
But financial markets are fantastic discounting mechanisms. If investors were demanding austerity, or were concerned about the lack of austerity in the US, then clearly they'd be voting with their dollars. The fact that interest rate spreads between 10-yr Treasuries and 10-yr Gilts are basically the same before UK's austerity and after, should lead reasonable people to the conclusion that the credit markets don't give a rats behind about austerity.

Meanwhile austerity measures are being offset by a weakening economy (which is exactly what textbook economics said would happen).

UK Budget Gap Widens as Income Falls
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Old 05-27-2011, 10:15 AM   #87
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Can you expand on the caveat in your earlier #6 then? I think that is key to this:
The 'caveat' is a well established formula of government debt sustainability. In short, it says that real economic growth needs to at least match real interest rates on borrowing. If growth is lower, than the government needs to run primary surpluses (a surplus before paying interest) to offset increasing borrowing costs relative to GDP. If growth is higher, than the government can run deficits.

A good estimate for the U.S. is that we can run a deficit before interest costs of ~1.5% of GDP. That's the deficit (before our real interest cost) that would keep our debt / GDP ratio stable forever.

To get a sense as to how far away we are from this stability, here is the most recent CBO projections. The 'Extended Baseline Scenario" is their projections using existing law. In other words, the 'Extended Baseline" is what would happen if everyone in Congress just stopped showing up to work and passed no new laws. Debt basically stabilizes in the mid 70% area of GDP (although we still need long-run entitlement reform). This, of course, is not the story we hear. What we hear is that we're on a run-away train and savage spending cuts need to take place immediately or we're all going to die. It's easy enough to see that there are motivations at work in our political debates that really have nothing to do with the deficit, debt, or fiscal sustainability.
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Old 05-27-2011, 10:30 AM   #88
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To me, the problem is that is 'isn't' until it 'is'...


Not a lot of people saw the RE bubble... and even if you did not many people did anything about it... a lot of people said 'RE will not go down'... or any of the other phrases that were used to 'prove' that there was no bubble..

The same with the dot com era... 'it is different this time'...

Take a look at the % of debt to GDP... tell me why we are close to 100% (which we were at during WWII, but no other time)..


US Federal Debt as percent of GDP - Charts Tables History



Greece is at 130ish%.... we can get there if we do not change... heck, we probably are way past that number if you count the unfunded benefits such as SS and medicare...


So, it is not far fetched to talk about the possibility of a major crisis happening IF we keep spending a trillion a year more than we take in as income....
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Old 05-27-2011, 10:39 AM   #89
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The 'caveat' is a well established formula of government debt sustainability. In short, it says that real economic growth needs to at least match real interest rates on borrowing. If growth is lower, than the government needs to run primary surpluses (a surplus before paying interest) to offset increasing borrowing costs relative to GDP. If growth is higher, than the government can run deficits.

A good estimate for the U.S. is that we can run a deficit before interest costs of ~1.5% of GDP. That's the deficit (before our real interst cost) that would keep our debt / GDP ratio stable forever.

To get a sense as to how far away we are from this stability, here is the most recent CBO projections. The 'Extended Baseline Scenario" is their projections using existing law. That is, this is what would happen if everyone in Congress just stopped showing up to work and passed no new laws. Debt stabilizes at ~79% of GDP. This, of course, is not the story we hear. What we hear is that we're on a run-away train and savage spending cuts need to take place immediately or we're all going to die.

The problem is that the lower number means that our congress critters do NOT show up and pass laws.... what chance do we have of that happening


Right now we are borrowing 40% of what we spend.... I think that this is not sustainable for the long term...

I think we are spending close to 24% or 25% of GDP... I think this is also not sustainable for the long term...


Get spending back to 20% and income back to 18% and I think a lot of people will not be worried...
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Old 05-27-2011, 10:44 AM   #90
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Originally Posted by Gone4Good View Post
The 'caveat' is a well established formula of government debt sustainability. In short, it says that real economic growth needs to at least match real interest rates on borrowing. If growth is lower, than the government needs to run primary surpluses (a surplus before paying interest) to offset increasing borrowing costs relative to GDP. If growth is higher, than the government can run deficits.

A good estimate for the U.S. is that we can run a deficit before interest costs of ~1.5% of GDP. That's the deficit (before our real interest cost) that would keep our debt / GDP ratio stable forever.

To get a sense as to how far away we are from this stability, here is the most recent CBO projections. The 'Extended Baseline Scenario" is their projections using existing law. In other words, the 'Extended Baseline" is what would happen if everyone in Congress just stopped showing up to work and passed no new laws. Debt basically stabilizes in the mid 70% area of GDP. This, of course, is not the story we hear. What we hear is that we're on a run-away train and savage spending cuts need to take place immediately or we're all going to die. It's easy enough to see that there are motivations at work in our political debates that really have nothing to do with the deficit, debt, or fiscal sustainability.
Two comments:

So negative interest rates probably make the deficit appear even easier to finance. As long as the Fed keeps short term rates negative and the Treasury finances most of the deficit and rolls over most of the debt at short term rates, there is no problem. What happens if (when) short interest rates revert to trend levels? Higher rates increase interest cost which raises the deficit which can become a self-feeding negative cycle.

Future entitlement costs are rising faster than future sources of revenue to pay them. The trend leads to clearly unaffordable spending levels. The best time to deal with an unmanageable deficit is while it is still manageable.
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Old 05-27-2011, 10:56 AM   #91
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To me, the problem is that is 'isn't' until it 'is'...
Agreed. And there are limits, as we've already established. But we're not near those limits in any practical sense. So the challenge isn't that we're running up against objective borrowing limits in the near, or even intermediate term. It's that we may run up against limits to market credulity . . . that market participants begin to fear that the US is really a Banana Republic and is incapeable of governing itself.

So the question is, what would forestall that?
1) Long-term budget agreement that cuts spending and raises taxes over the intermediate term
2) Long-term entitlement reform that slows entitlement growth

What potentially accelerates that?
1) Failure to raise the debt limit
2) An absolute rejection of any tax increases of any kind, for any reason
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Old 05-27-2011, 11:06 AM   #92
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Right now we are borrowing 40% of what we spend.... I think that this is not sustainable for the long term...

I think we are spending close to 24% or 25% of GDP... I think this is also not sustainable for the long term...
The recession has had a tremendous impact on both tax receipts and federal spending. Neither, at the moment, reflect what we should expect over the long-term.

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Get spending back to 20% and income back to 18% and I think a lot of people will not be worried...
This may end up being a shocker to a lot of people, but keeping spending at historic levels of the economy may not be possible, or at least desirable, over the long-term. It helps to think about where the government spends its money . . . about half on old age support (SS & Medicare) and another quarter on defense. The half on old age support is going to grow faster than GDP for a couple of reasons that are completely out of our control. 1) Demographics. More old people means more spending 2) Health care inflation.

It's baked in the cake that half the budget is going to grow faster than GDP. We can try to offset that growth with cuts to the other half, but that will probably not be enough. The other option is to cut benefits to retirees pretty significantly.
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Old 05-27-2011, 11:09 AM   #93
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A good estimate for the U.S. is that we can run a deficit before interest costs of ~1.5% of GDP. That's the deficit (before our real interest cost) that would keep our debt / GDP ratio stable forever.
Maybe I'm confusing terms here, but doesn't this indicate a problem - 9.8% compared to your 1.5%? :

2011 United States federal budget - Wikipedia, the free encyclopedia

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For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP.

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...

So the question is, what would forestall that?
1) Long-term budget agreement that cuts spending and raises taxes revenue over the intermediate term
2) Long-term entitlement reform that slows entitlement growth

What potentially accelerates that?
1) Failure to raise the debt limit
2) An absolute rejection of any tax revenue increases of any kind, for any reason
Revenue is key. Maybe raising taxes is the way to do it, maybe not. Increased economic growth without changing taxes will increase revenue, so let's not paint it out of the picture.

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Old 05-27-2011, 11:12 AM   #94
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Two comments:

So negative interest rates probably make the deficit appear even easier to finance.
That estimate isn't based on a point in time. Real US GDP growth has averaged 3.3% historically. Real interest costs on the Treasury Portfolio, which has a pretty short average life of about 5 years, averages about 1.5% or so. The 1.5% primary deficit estimate mentioned above falls within a reasonable range.

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Future entitlement costs are rising faster than future sources of revenue to pay them. The trend leads to clearly unaffordable spending levels. The best time to deal with an unmanageable deficit is while it is still manageable.
Agreed. But dealing with long-term issues over the long-term doesn't require spending cuts or tax hikes now, now, now. I think we could go a long way toward financial stability by simply phasing in entitlement reforms over the next couple of decades. Add in some reasonable agreement about spending levels and tax rates to be implemented over the intermediate term and we're done.
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Old 05-27-2011, 11:24 AM   #95
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Maybe I'm confusing terms here, but doesn't this indicate a problem - 9.8% compared to your 1.5%?
They're not apples to apples, but the bigger issue is that you're taking a deficit that reflects depressed tax receipts and higher safety-net spending and treating it as a run-rate number. Every economist forecasts that deficit to come down, even if we don't do a thing.

Please understand. I'm not saying we don't need to take any action. I think my comments above show a belief that taxes (yes taxes) need to increase, spending needs to decrease, and entitlements need to be reformed. How we do that, and over what time period, is important, though.

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Revenue is key. Maybe raising taxes is the way to do it, maybe not. Increased economic growth without changing taxes will increase revenue, so let's not paint it out of the picture.

-ERD50
Assuming higher revenues without raising taxes is not a reasonable position, in my view. The evidence of the past 20 years is pretty clear - taxes increased in the 90's and so did revenues as a share of GDP. Taxes declined in 00's and revenues declined as a share of GDP.

I'm always amused when people forget that the "Laffer Curve" is indeed a curve and not a downward sloping straight line.
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Old 05-27-2011, 11:45 AM   #96
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They're not apples to apples, but the bigger issue is that you're taking a deficit that reflects depressed tax receipts and higher safety-net spending and treating it as a run-rate number. Every economist forecasts that deficit to come down, even if we don't do a thing.

Please understand. I'm not saying we don't need to take any action. I think my comments above show a belief that taxes (yes taxes) need to increase, spending needs to decrease, and entitlements need to be reformed. How we do that, and over what time period, is important, though.



Assuming higher revenues without raising taxes is not a reasonable position, in my view. The evidence of the past 20 years is pretty clear - taxes increased in the 90's and so did revenues as a share of GDP. Taxes declined in 00's and revenues declined as a share of GDP.

I'm always amused when people forget that the "Laffer Curve" is indeed a curve and not a downward sloping straight line.

Just like spending is up due to the financial crisis, revenue is down...

So, if the economy improves, spending will go down and revenue will go up without raising taxes, or maybe I should say tax rates....


I do not have a problem with cutting some of the many tax credits to businesses along with cutting farm subsidies and the ethonol subsidy... I do not consider these 'tax increases' as some do...

Also, I am not sure defecits are projected to come down... from what I remember they are projected to be at least $1 tillion a year for the next decade... I guess that is down from the $1.5 now, but I think the run rate is a lot higher than we can manage...
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Old 05-27-2011, 11:59 AM   #97
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Just like spending is up due to the financial crisis, revenue is down...

So, if the economy improves, spending will go down and revenue will go up without raising taxes, or maybe I should say tax rates....

I guess the confusion is that I'm talking about closing a budget gap over the course of the economic cycle, rather than a point in time. Yes revenues will increase as employment increases, but that is already included in everyone's projections. The question is "How do we close the budget gap that remains even after the economy recovers."

I don't think it is reasonable to assume that we can wave a magic supply-side wand and create above trend economic growth and therefore extra revenue without raising taxes. If cutting taxes and regulation generated extra revenues, it should be apparent in the data of the past decade.

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Also, I am not sure defecits are projected to come down... from what I remember they are projected to be at least $1 tillion a year for the next decade... I guess that is down from the $1.5 now, but I think the run rate is a lot higher than we can manage...
The most recent budget projects deficits declining from $1.7T in 2011 to $750B in 2016. Obviously there is still work to do, but we don't really need policies designed to close a gap that is 11% of GDP . . . more like 5%.
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Old 05-27-2011, 12:39 PM   #98
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I guess the confusion is that I'm talking about closing a budget gap over the course of the economic cycle, rather than a point in time. Yes revenues will increase as employment increases, but that is already included in everyone's projections. The question is "How do we close the budget gap that remains even after the economy recovers."

I don't think it is reasonable to assume that we can wave a magic supply-side wand and create above trend economic growth and therefore extra revenue without raising taxes. If cutting taxes and regulation generated extra revenues, it should be apparent in the data of the past decade.



The most recent budget projects deficits declining from $1.7T in 2011 to $750B in 2016. Obviously there is still work to do, but we don't really need policies designed to close a gap that is 11% of GDP . . . more like 5%.

Thanks for the link...

But, spending is going up (according to the table) at a rate a lot higher than inflation... below are increases in spending and the percent of increase from the previous year.... this has nothing to do with the revenue side, just the spending.. I did not see the breakdown, but the % is kinda high....

2014 estimate169,823 5.44%
2015 estimate173,698 5.28%
2016 estimate236,887 6.84%
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Old 05-27-2011, 01:24 PM   #99
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Thanks for the link...

But, spending is going up (according to the table) at a rate a lot higher than inflation...

2014 estimate169,8235.44%2015 estimate173,6985.28%2016 estimate236,8876.84%
I'm not sure where the numbers you quote are coming from. I see outlays rising from $3.812T in 2011 to $4.467T in 2016. That is a compound growth rate of 3.2%. As a percentage of GDP spending declines from 25.3% in 2011 to 22.6% 1n 2016.

It does look like spending increases more in the back half of the forecast and less in the earlier part. My guess is that spending growth is slow the next couple of years as we spend less on things like unemployment insurance. Spend grows more quickly from 2014-2016 because of SS and Medicare. But that's just a guess, I'd have to dig in to the details to know for sure.

PS Spending does generally grow by more than inflation. We have a growing population.
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Old 05-27-2011, 02:27 PM   #100
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The other elephant in the room is the FED. With the trillions the treasury has borrowed and the trillions in QE by the FED there would have been a rip roaring recovery in a usual buisness cycle. The FED was wrong about the tech bubble and wrong about the housing bubble. Let's hope they're right about QE and their exit strategy if they have one. If within a year we have QE3 or some other never tried before stimulus we'll know it's not. The Ivy league econ professors are doing some grand experiments on the US economy. Hope they don't blow up.
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