Transcript Auerbach FRB Atlanta slides

The Economic Crisis and the
Fiscal Crisis: 2009 and Beyond
Alan Auerbach and William Gale
U.S. Federal Net Debt-GDP Ratio
60
Percent of GDP
50
40
30
March 2001 Projections
20
10
0
-10
2001
2002
2003
2004
2005
2006
End of Fiscal Year
2007
2008
2009
Federal Surpluses: 2001 Projections vs. Actual
6
January 2001 CBO Baseline Projections
4
Surplus as a Percent of GDP
2
0
-2
-4
-6
-8
-10
-12
-14
2001
2002
2003
2004
2005
2006
2007
2008
2009
Federal Surpluses: 2001 Projections vs. Actual
6
January 2001 CBO Baseline Projections
4
Surplus as a Percent of GDP
2
0
-2
-4
Observed Surplus
-6
-8
-10
-12
-14
2001
2002
2003
2004
2005
2006
2007
2008
2009
What Happened?
Three Phases:
1. The Economy
2. Policy
3. The Great Recession
Federal Surpluses: 2001 Projections vs. Actual
6
January 2001 CBO Baseline Projections
4
Surplus as a Percent of GDP
2
Economic and Technical Changes
0
Policy Changes
-2
-4
Observed Surplus
-6
-8
-10
-12
-14
2001
2002
2003
2004
2005
2006
2007
2008
2009
What Happened?
Three Phases:
1. The Economy
2. Policy
3. The Great Recession
•
Increased deficit in 2009 due to weak economy plus
ARRA, TARP, etc., the economy itself the more
important factor
U.S. Federal Net Debt-GDP Ratio
60
Percent of GDP
50
Actual
40
30
March 2001 Projections
20
10
0
-10
2001
2002
2003
2004
2005
2006
End of Fiscal Year
2007
2008
2009
U.S. Federal Net Debt-GDP Ratio
900
800
Percent of GDP
700
600
500
400
300
September 2009 Projections
200
100
0
2001
2011
2021
2031
2041
2051
End of Fiscal Year
2061
2071
2081
U.S. Federal Net Debt-GDP Ratio
900
800
Percent of GDP
700
600
500
400
300
September 2009 Projections
200
100
0
2001
2011
2021
2031
2041
2051
End of Fiscal Year
2061
2071
2081
Fiscal Gaps
Baseline:
Percent of GDP
$ Trillions (PV)
CBO
Through Permanent
2085
5.14
39.3
6.93
100.2
Administration
Through Permanent
2085
6.86
52.5
8.70
125.8
Implications of Recent Events
and Policy Interventions
1. No Worries About the Fed
Having No Debt to Buy
2. What is Debt? What is
Fiscal Policy?
3. The “Old-Fashioned” Solution
Won’t Work
• US federal debt:
– Publicly held:
– Bills + TIPS:
$ 12.3 trillion
7.8 trillion
2.4 trillion
• Total federal fiscal imbalance:
– Through 2085:
– Through :
$ 53 trillion (6.9% of GDP)
126 trillion (8.7% of GDP)
• Entitlement programs are indexed either
explicitly (Social Security) or implicitly
(Medicare, Medicaid)
4. Low Interest Rates: Not a
Solution
Low Interest Rates
• Reduce rate of debt accumulation, so might
delay financial crisis
• But low interest rates also reduce our ability to
set aside the needed funds for really large
future deficits
• Net impact of assuming zero interest rates for
next 20 years is to increase the size of the
fiscal gap, over the infinite horizon
5. On the Spending Side, It’s
Clear Where the Action Is
Federal Spending Components
14
Medicare + Medicaid + Social Security
Percent of GDP
12
10
8
6
All Discretionary Spending (including Defense)
4
2
0
2010
2015
2020
Fiscal Year
2025
6. Health Care Reform:
Contributing to the Problem, or
the Solution?
7. Would Fiscal Rules Help?
Conclusions