Big economy, small deficits
Right this second, the US economy GDP is running at the rate of about $13,000,000,000,000, and current deficits are small and manageable, though you’d never know it from reading the government’s own press releases or articles in the MSM. We wrote about this previously when long-forecast reductions in the deficit came somehow as a surprise to the NYT. But the NYT is not alone in spreading surprise, consternation and economic illiteracy. You certainly can’t figure out what’s going on from the AP’s economic reporting either:
The federal deficit this year will be less than previously forecast but will total $1.76 trillion over the next decade, and could be double that estimate if President Bush’s tax cuts are made permanent, the Congressional Budget Office said Thursday. The $260 billion deficit forecast for the current budget year, which ends Sept. 30, is $112 billion below the office’s last estimate, in March….But the CBO forecast the improvement as short-lived, projecting the gap between revenues and spending will rise to $286 billion in 2007 and total $1.76 trillion over the next decade.
We suppose that the $1.76 trillion estimate deficit over the next decade is supposed to be scary — but how scary is it compared to the GDP total of $140 trillion or so that it relates to. Or, to take another example via Will Franklin and Tigerhawk, defense spending is currently a tiny percentage of GDP:
Will Franklin also helpfully points out that major entitlement spending, currently around 9% of GDP, is expected to continue to rise sharply in coming years. And that is perhaps a useful item with which to conclude our summary: the US economy is astonishingly, unimaginably large, about $13 trillion (6-7x that of China for example). The US budget deficit is smallish, around $260 billion (or around 2% of GDP). And, stories to the contrary, expenditures on the military are miniscule by historical standards, at 4% or so of GDP. What the US needs to guard against and control over the next period of time are runaway entitlements. Otherwise, things are pretty good, and certainly outstanding by comparison with history. (HT: Larwyn)
August 21st, 2006 at 12:27 pm
A ten cent deficit is too high. You know that the deficit won’t be managed, it will be monetized.
August 21st, 2006 at 6:29 pm
How I Learned To Stop Worrying And Love The Deficit
It was with some shock that I came to realize a few years ago that all the Republican (and now all the Democratic) handwringing about the Federal budget deficit is just, well, posturing. The truth is that our deficit isn’t that h…
August 21st, 2006 at 7:35 pm
Deficit of 1.76 Trillion over the next decade? I’ll take it, that’ll be pretty damn impressive if we can keep limiting our deficits to an average of $176 billion a year — imagine 10 years hence when the nominal economy will be over $20 trillion, tax revenues maybe $3.5 trillion, and the deficit less than one percent GDP! Wow, the Debt:GDP ratio will fall like a stone in that interim, and the debt servicing portion of the budget would fall rapidly also.
How nice of this keen AP journalist to recognize excellent economic tidings, and to decide to bring us news of this too-good-to-be true fiscal restraint. Bravo to him.
August 21st, 2006 at 8:57 pm
These statistics are well analyzed if you assume they are accurate. Unfortunately, as detailed in a few news articles during the past few weeks, they are not. Because the Federal government keeps its books based on its own accounting standards, rather than Generally Accepted Accounting Principles (GAAP), the Federal government vastly understates its deficit. If you do not count the entitlement spending that is the subject of this post, the REAL 2005 Federal budget deficit is between $700 billion and $3.5 trillion. If you do count the entitlement spending that we’ve promised our citizens, the REAL 2005 budget deficit is around $40 trillion (http://www.schlosserforcongress.com/media-press/op-ed/060809_Enumerating_insanity.php). Democratic Congressman Jim Cooper of Tennessee is trying to pass legislation that would require the Federal government to keep its books using the same accounting standards that the Federal government requires of businesses and individuals.
August 22nd, 2006 at 5:10 am
Dave hit the nail on the head — the accounting system is so squirrelly that the deficit numbers are bullshit.
For example, when the feds put a new carrier into service, they expense the cost before the thing sail (largely). A business would capitalize the item and write it off over its useful life. Granted, over the long-term, this doesn’t make any difference, the same expense is charged, but it does distort the incidence of expense. If you buy a house for$400,000 when you are making $100,000 a year, you don’t think of that as being a $300,000 deficit for the year.
A second but related point is that the government makes no distinction between capital expenses and consumption. We don’t really have a meaningful asset statement to offset our liabilities. How much do you think Disney would pay for the National Park system versus the value it is carried on our books? How much would Iran pay for the 1st Infantry Division? These are very real, very valuable national assets that don’t show up anywhere. Of course, the scary side of this type of accounting would be Teddy Kennedy posturing that a new entitlement spending program “increases the value of our population”.
August 22nd, 2006 at 8:46 am
IMHO, http://www.optimist123.com/optimist/ is a MUST-READ site on the deficit (i.e. don’t stop at the first link in the blog post). For example, here’s a good quote on annual deficits: “At least some level of fiscal deficit is desirable, because a government deficit is a private sector surplus.” — i.e. think “our T-bill assets” rather than “government’s DEBT” (what a scary word). Naturally he has also covered the foreign-owned debt, so read up on that too. As for the recent USA Today and other coverage on the entitlement problem: it assumes we have to PAY OFF the long-term deficit. But, that’s simply not true; we can roll it over much like companies do (for very sound financial reasons). All we have to do is “keep GDP-per-person growing just a little bit faster than debt-per-person grows”. He also covers the home mortage analogy — pointing out that if you consider multiple generations, the typical family’s total mortage increases over time (as kids grow up and get their own), which isn’t cause for concern at all. My only complaint about the site: I find that his sometimes subtle irony gets in the way of clarity, but others may enjoy his dry wit. (The usual disclaimer: I don’t know the guy; I just stumbled on the site awhile back and am a big fan.)
August 22nd, 2006 at 8:52 am
Why do we have a deficit?
I sure wish that I had written this!
Big economy, small deficits
Right this second, the US economy GDP is running at the rate of about $13,000,000,000,000, and current deficits are small and manageable, though you’d never know it from reading t…
August 22nd, 2006 at 9:35 am
Paul seems to be making the opposite argument David makes, though. If you expense an aircraft carrier in the year it is commissioned, instead of capitalizing it over its useful life, that boosts spending in the year of commission, right? That would tend to exaggerate the deficit spending number for that year, not artificially diminish it.
David Schlosser says the deficit is really much larger than represented above, and supports that contention largely by citing entitlement spending as not included in the deficit calculations. Although that is a valid point (“borrowing” from the “Social Security Trust Fund” for decades served to reduce the apparent spending deficit, while leaving the SS funding gap for the future, for example,) it underscores the main point of this article. Namely, that it is runaway entitlement spending that will sink us, not deficit spending on everything else.
August 22nd, 2006 at 11:11 am
D Schlosser confuses liabilities with deficits;there’s a difference. The Federal government has legislated a liability for future payments of SocSec,Medicare and Medicaid (outlined in the SocSec trustees report) which are huge liabilities spread over future periods. GAAP may require recognition of some of those liabilities in the current period (although pension accounting is quite arcane). However,the Federal government runs a modified cash set of books because it reflects how much is received and spent in a given period.
This system is subject to its own issues as to timing of payment vs. incurrence of the liability but, for example, it is more than just theoretically possible for Congress to legislate changes to SocSec or other entitlement programs which would significantly alter the liabilities owed.
Having said that,the current trend line in Medicare expenditures alone render the point of the post (huge economy,small deficits) irrelevant as well. Medicare expenditures by 2050 will consume more than 18% of GDP or more than the total Federal tax revenue from all sources as a %age of the economy today. So not only will the Feds (read us) owe the then current 18% of GDP for Medicare but the 6% for SocSec,the 4% for defense,the 10+% for debt service etc. for a Federal tax rate in 2050 of close to 50% of GDP.
Those deficits might well have our grandchildren thinking that what Argentina and Brazil faced in the 1980s was as nothing compared to the future change in lifestyle here. The good news is that virtually everyone will be a millionaire.
August 22nd, 2006 at 5:34 pm
I don’t see any mention of the total public debt on this page. Currently it is running past $9 trillion dollars – Bush has nearly doubled it in 5 years, it was around $5.5 trillion when he took office. A deficit each year just adds to that amount. Eventually, it will be larger than the American economy. When that happens the entitlements for the baby boomers will be kicking in full force; then there won’t be any other options – we won’t be able to borrow to cover expenses as they will be ballooning, we’ll have to raise taxes… all thanks to the republican borrow and spend policies.
August 23rd, 2006 at 2:07 pm
As I said, there should be no deficit and no debt. The only way these debts will be paid is by monetizing them- increasing the money supply. That means that the currency used to pay them off will have substantially less buying power.
This translates into decreased savings (why save something that decreases in value every day?), more borrowing (Why not, easier to pay it off.), and a degraded future for those who DO pretend that their pensions will have value.
The U. S. dollar has lost about 80% of its value in the past 30 years. No matter what commodity or service you care to name, it was a fifth as “expensive” 30 years ago, which means that the dollars were worth 5X as much then. When we decided that we were all Keynsians, we abandoned the idea of sound money and things have become progressively worse.
The permanent inflation is now built into our economy. As long as the government keeps pushing out 5% or 6% money, the economy will appear to hum along. Unless something happens. Like $200 a barrel oil, or a mass sale of U. S. obligations by China, or the boomers wanting that social security and their IRA accounts. These things may never happen.
By the way, I wonder when Congress will start thinking about forgiving all the income taxes on those IRAs? Because you know that’s what the boomers are going to start crying about. I’d say about 2012? So it will be a campaign issue in 2016?