Tag Archives: GDP

It’s Not the Deficit, Stupid

From “That Terrible Trillion,” Paul Krugman, NYT:

“The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. Federal debt was higher at the end of the Clinton years than at the beginning – that is, the deficits of the Clinton administration’s early years outweighed the surpluses at the end. Yet because gross domestic product (GDP) rose over those eight years, the best measure of our debt position, the ratio of debt to GDP, fell dramatically, from 49% to 33%.

“Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to GDP even if we had a $400 billion deficit. You can argue that we should do better; but if the question is whether current deficits are sustainable, you should take $400 billion off the table right away.

“That still leaves $600 billion or so. What’s that about? It’s the depressed economy – full stop.

“First of all, the weakness of the economy has led directly to lower revenues; when GDP falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.

“Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.

“Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.”  Emphasis added.

WSJ Warns Against Cutting Deficit Too Quickly

The economics editor at the WSJ, David Wessel, sounds like Paul Krugman!  From “Putting the Brakes on Cutting the Deficit”:

“The deficit…is shrinking even before the year-end fiscal cliff or a last-minute compromise to avoid it.  In the depths of the most recent recession, the fiscal year that ended Sept. 20,.2009, the deficit was 10.1% of gross domestic product….  Since then, the deficit has shrunk to 9% of GDP in 2010, 8.7% in 2011 and 7% in fiscal 2012.  Private analysts predict the deficit will be between 5.5% and 6% of GDP in fiscal 2013…

“One reason the deficit is still large is that the economy is still lousy:  More unemployment means fewer taxpayers as well as more government spending on jobless benefits, food stamps and the like.  As the economy slowly improves, the deficit shrinks as these automatic stabilizers…adjust.  Tax revenue rises.  Safety-net spending falls.  The U. S. budget deficit has been coming down at roughly the same pace as the U. K..’s — with far less austerity than Britain’s David Cameron has prescribed and substantially better growth.”

Really, people, short-term, we’d be better off with more government spending. 

 

Our Limping Economy

GDP growth in the second quarter was only 1.5%, compared to 2.0% in the first quarter.

Our economy must grow between 2 and 2.5% just to keep unemployment, currently at 8.2%, from rising.

As for the third quarter, forecasts are for growth in the 1 to 1.5% range.

This is all good news for Mitt, and Mitt is bad news for us because he wants British-like austerity that would definitely send us back into recession*:

“The U. K.’s economy suffered a much larger contraction than expected in the second quarter, heightening questions about the pace and effectiveness of the government’s austerity program and fueling the broader debate across Europe about how to tackle the Continent’s economic woes.

“The deteriorating British economy is likely to intensify the debate both within the U.K. and other debt-laden countries in the West about cuts versus stimulus, amid increasing evidence that austerity is proving a major drag on growth.” Emphasis added.

* “U.K. Stumble Fuels Austerity Debate,” Ainsley Thomson and Cassell Bryan-Low, WSJ

 

The Fair Thing Isn’t Always the Right Thing

A “Grexit” may be the fair thing, but it may not be the right thing.  It may be cutting off the nose of Greece to spite Europe’s face.

From “The Fairness Trap,” James Surowiecki, The New Yorker:

“This [a Grexit] isn’t an outcome that anyone wants.  Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P.  It would be costly for the rest of Europe, too.  Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy….  That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.

“Rationally, then, this standoff should end with a compromise — relaxing some austerity measures, and giving Greece a little more aid and time to reform.  And we may still end up there.  But the catch is that Europe isn’t arguing just about what the most sensible economic policy is.  It’s arguing about what is fair.  German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay.  They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform.  But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration.  The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

“The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it.

“You can see this in the way the U. S. has dealt with the foreclosure crisis.  Plenty of economists recommended giving mortgage relief to underwater homeowners, but that has not happened on any meaningful scale, in part because so many voters see it as unfair to those who are still obediently paying their mortgages.  Mortgage relief would almost certainly have helped all homeowners, not just underwater ones — by limiting the spillover impact of foreclosures on house price — but, still, the idea that some people would be getting something for nothing irritated voters.

“The fairness problem is exacerbated by the fact that our definitions of what counts as fair typically reflects…a ‘self-serving bias.’  You’d think that the Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging.  Or Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again.  Indeed, the self-serving bias leads us to define fairness in ways that redound to our benefit, and to discount information that might conflict with our perspective.  This effect is even more pronounced when bargainers don’t feel that they pare part of the same community — a phenomenon that psychologists call ‘social distance.’  The pervasive rhetoric that frames the conflict in terms of national stereotypes — hardworking, frugal Germans versus frivolous, corrupt Greeks, or tightfisted, imperialistic Germans versus freewheeling, independent Greeks — makes it all the more difficult to reach a reasonable compromise.

“From the perspective of society as a whole, concern with fairness has all kinds of benefits:  it limits exploitation, promotes meritocracy, and motivates workers.  But in a negotiation where neither side can have what it really wants, and where the least bad solution is as good as it gets, worrying too much about fairness can be suicidal.  To move Europe away from the brink, voters and politicians on all sides need to stop asking themselves what’s fair and start asking themselves what’s possible.”  Emphasis added.

 

 

We Are All Keynesians Again

Mitt now acknowledges that we can’t cut spending immediately without killing our fragile recovery.  In an interview with Mark Halperin from Time, Mitt said:

“Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%.  That is by definition throwing us into recession or depression.  So I’m not going to do that, of course.  … I don’t want to have us go into a recession in order to balance the budget.”  Sounding a little like Paul Krugman there, Mittens!

I had wondered how Mitt, given his business background, could not understand basic economics.  The truth is that he does understand.  Until now, he’s just been shy about admitting that knowledge because he’s been pandering to those who want huge cuts and want them immediately, not understanding the drastic economic contraction that would cause.

Look at what David Cameron’s austerity has done to Britain, sending her back into recession.

A Couple of Interesting Stats

“In 1989, the chief executives of the seven biggest banks in the country made about 100 times the income of the typical American household, on average.  On the eve of the crisis, in 2007, they made more than 500 times the median.

“Economists know there is a point after which more lending stops helping and starts hurting growth.  One study puts it at about 110 percent of gross domestic product.  On the eve of the crisis, credit to the private sector in the United States reached 213 percent of G.D.P., up from 96 percent in 1982.  And all we got was a mass of busted residential mortgages.”

Eduardo Porter, “The Modest Worth to Society of Those Big Banks,” NYT

We Are Approaching a Cliff Too, Just Like Europe

As we watch Europe fall off a cliff, let’s not forget that we ourselves will take a plunge on January 1 unless Congress pulls us back.

The CBO has gamed out three scenarios.  If the Bush tax cuts expire and the automatic cuts in domestic and defense spending take effect, GDP will fall 1.3% between the fourth quarter of 2012 and the second quarter of 2013.  So we’re talking another recession.

If the Bush tax cuts are extended, the payroll tax cut expires, and the automatic spending cuts don’t happen, GDP will grow by 1.7% in the same time frame.  No new recession, but not great growth either.

If we keep on the same path, with all tax cuts extended (Bush and payroll) and no automatic spending cuts, GDP will grow by 5.3%.

I’m with Option 3.  Let’s get some solid growth, and then we can deal with the deficits and national debt.