Tag: budget deficit

The Greek Model

It was a good idea to get science and democracy from the ancient Greeks. It’s not such a good idea to get fiscal policy from the modern Greeks.

But that’s the way we’re headed.

Greece has a budget deficit of 13.6 percent. We’re not in that league – ours is only 10.6 percent, the highest level since 1945.

Greece has a public debt of 113 percent of GDP. We’re not there yet. But the 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion.

Under President Obama’s budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020. It could rise to 215 percent of GDP in 30 years. Welcome to Greece.

Here’s a graphic presentation of the official debt and real net liabilities of various countries, including the United States and Greece at the right. (From the Telegraph, apparently based on Jagadeesh Gokhale’s report.)

offbalancesheet

And here’s a Heritage Foundation chart on where the national debt is headed in the coming decade:

Paul Krugman wrote, “My prediction is that politicians will eventually be tempted to resolve the [fiscal] crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.” Now he was writing in 2003, when a different president was in office, but he was also warning about the possibility of a ten-year deficit of $3 trillion. Presumably the same warnings apply to today’s much larger deficit projections. And he was absolutely right to fear that government would turn to inflation as a supposed solution.

Furor over Government Employees

Concern about the pay, benefits, and performance of government employees seems to be growing. Chris Edwards’s articles on how government pay is outpacing private-sector pay have generated media attention, cartoons, and angry rebuttals from the head of the federal Office of Personnel Management. Steven Greenhut has a new book, Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, and is writing lots of newspaper articles on the high costs of government unions, also the topic of a recent Cato Policy Analysis. New Jersey unions are not finding much sympathy as they try to hold on to their raises, benefits, pensions, and work rules in the face of Gov. Chris Christie’s attempt to cut the budget. Liberal journalist Mickey Kaus is running for the U.S. Senate, trying to warn California’s voters and the Democratic Party about the excessive power and destructive influence of public employee unions.

And now Saturday Night Live. The zeitgeist-riding comedy show had a truly harsh sketch this weekend about the “Public Employee of the Year Awards.” It touched every element of popular resentment toward government workers: “people with government jobs are just like workers everywhere – except for the lifetime job security, guaranteed annual raises, early retirement on generous pensions, and full medical coverage with no deductibles, office visit fees, or copayments” – “retirement on full disability” by an obviously young and healthy worker – “Surliest and Least Cooperative State Employee” – “3200 hours [a year] on the job, all of it overtime” – New York school janitors living in Florida – employees with two current jobs and full disability – an entire workday at the DMV without serving a single customer – no-work contracts –  surprisingly early closings – and “he’s on break.”

Time for unions to start worrying?

Thursday Links

Tuesday Links

  • Price controls have failed in the past and there is no reason to think they will work now. So why is the president proposing price controls on health care? Michael Tanner: “Attempts to control prices by government fiat ignore basic economic laws – and the result could be disastrous for the American health-care system.”

A Fiscal Train Wreck

That is the title of a 2003 New York Times column by economist Paul Krugman. The gist of his column was that the Bush tax cuts and future entitlement program liabilities would usher in calamitous deficits. Setting aside the tax cut and entitlements issue, Krugman’s comments on the dangers of deficits are interesting considering seven years later Krugman is one of the most prominent supporters of massive deficit spending to stimulate the economy.

Here are some selected Krugman quotes from the column:

With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

Two years ago the administration promised to run large surpluses. A year ago it said the deficit was only temporary. Now it says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high. A leading economist recently summed up one reason why: ‘When the government reduces saving by running a budget deficit, the interest rate rises.’ Yes, that’s from a textbook by the chief administration economist, Gregory Mankiw.

But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won’t happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

Although this shouldn’t be construed as an endorsement of George Bush’s fiscal policies, the deficit for fiscal year 2003 when Krugman wrote his column was $378 billion. The Congressional Budget Office just reported that the deficit for the first quarter of FY 2010 was $434 billion.

The following chart shows the annual deficits from fiscal years 2002 through 2010 (projected). For 2009 and 2010 the first quarter deficit is also shown. In short, the two most recent first quarter deficits have been about $100 billion higher than the average annual deficits run from 2002 to 2008.

In FY2003, the deficit was 3.4 percent of GDP – for FY2010 it’s projected to be 10.6 percent. According to the President’s optimistic FY2011 budget, annual deficits won’t fall below 3.6 percent of GDP at any point in the next ten years.

Yes, Krugman believes that large deficit spending is necessary to turn the economy around. But that doesn’t change the fact that his dire warnings about deficits in 2003 should apply to today’s even larger deficits, especially now that we’re even closer to an entitlement crisis. However, Krugman recently penned a column warning against “deficit hysteria” in which he makes comments that are more than just a little at odds with his 2003 column:

These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.

Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

Scratching your head?  I am too.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

Deficit Prognostications

Exactly two years ago, George W. Bush released his final budget. Here’s what the Washington Post had to say:

[T]he president’s budget envisions a big jump in the budget deficit, from $163 billion in 2007 to about $400 billion in 2008 and 2009. Much of that increase will be the result of a slowing economy and a stimulus package expected to cost about $150 billion.

Today’s release of President Obama’s FY 2011 budget shows that those deficit prognostications were way off:

Instead of a “big jump” to $400 billion in 2009, the actual deficit turned about to be a trillion dollars higher. Bush deserves most of the blame for that deficit, but the 2010 and 2011 deficits will be on Obama.

The frightening prospect is that, like Bush, Obama’s future budget projections will also turn out to be low-balled. Whether it has been war, natural disasters, or a recession, Bush and Obama have both responded to any “crisis” by spending gobs of money. Given that even Obama is projecting annual deficits still in the trillion dollar range by 2020, taxpayers had better hope the Taliban, Mother Nature, and the economy start cooperating.