Transcript Economic Disruption and U.S. Federal Budget Deficits: History

Economic Disruption and U.S. Federal Budget Deficits:
History, Outlook, Options
by Robert M. Coen
Emeritus Professor of Economics
Northwestern University
Web page: http://faculty.wcas.northwestern.edu/~rcoen
Shirley Ryan Learning for Life Lectures
October 27, 2010
Chronology of Disruption
• 2001-07: Unprecedented mortgage debt accumulation
Home prices skyrocket, peak in 2006, plummet
• 12/2007: Housing-led recession begins
• 02/2008: Bush signs $168b stimulus bill
• 03/2008: Bear Stearns collapses
Fed aids primary market dealers
• 09/2008: Lehman bankruptcy
$85b credit line to AIG
Fannie Mae, Freddie Mac rescued
• 10/2008: Fed rescues commercial paper market
$700b TARP enacted
• 2007-08: Fed cuts funds rate from 5.25% to ~0
• 02/2009: Obama signs $787b stimulus bill
Growth of Debt by Sector
Percent of GDP
2000Q4
Total
Households
Mortgages
Businesses
Federal Govt
State-local Govts
Source: Federal Reserve, Flow of Funds
2007Q4
Change
179
222
+43
69
47
65
33
12
97
74
74
36
15
+28
+27
+9
+3
+3
S&P/Case-Shiller Home Price Index, 1987Q1-2010Q2
200
180
Index
160
140
120
100
80
60
88
90
92
94
96
98
Year
00
02
04
06
08
10
Unemployment Rate, 2001M1- 2010M9
11
Percent of Labor Force
10
9
8
7
6
5
4
2001
2002
2003
2004
2005
2006
2007
Year
Source: Bureau of Labor Statistics
2008
2009
2010
Consequences for Federal Deficit and Debt
Tax receipts fall sharply -- income/output down, rate cuts
Unemployment benefit payments rise sharply
Unemployment rate stubbornly high – housing frictions
Deficit reaches record levels
Additional borrowing to fund capital infusions to business
Federal debt approaches record levels
Sources of Deficit Increase in Current Recession
Receipts
Personal taxes
Corp profits taxes
Indirect taxes
Soc ins taxes
Other
Expenditures
Goods and services
Transfers
Aid to states
Interest
Other
Deficit
% of GDP
2007Q4
2009Q3
Change
2,666.1
2,176.3
-489.8
1,196.4
296.2
94.2
957.8
121.5
827.0
127.7
97.0
953.5
171.0
-369.4
-168.5
+2.8
-4.3
+49.5
2,942.8
3,532.9
+590.1
870.4
1,289.2
381.9
304.7
96.5
999.7
1,637.6
490.9
273.8
131.0
+129.3
+348.4
+109.0
-30.9
+34.5
276.7
1.9
1,356.7
9.6
+1,080.0
Federal Receipts, Expenditures, and Surplus, 1947Q1-2010Q2
Percent of GDP
30
25
Percent of GDP
20
15
10
5
0
-5
-10
50
55
60
65
70
75
80
85
90
95
Year
Surplus
Receipts
Expenditures
00
05
10
Federal Government Debt, 1952Q1-2010Q2
70
Percent of GDP
60
50
40
30
20
55
60
65
70
75
80
Year
Source: Federal Reserve, Flow of Funds
85
90
95
00
05
10
Future Outlook
CBO: Baseline Federal Budget Projection
Total deficit
($ billions)
Deficit/GDP
(Percent)
Debt/GDP
(Percent)
2011-15
$3,202
2011-20
$6,246
2011
7.0
2015
2.7
2020
3.0
66.1
67.3
69.4
Source: CBO, The Budget and Economic Outlook: An Update, August 2010
Future Outlook
CBO: Effects of Alternative Policies on Deficit
(Billions of dollars)
2011-15
2011-20
$3,202
$6,246
Troop cut by 30,000 by 2013
Freeze discretionary spending
-458
-303
-1,508
-1,650
Extend expiring Bush tax cuts
Extend other expiring tax cuts
Index AMT for inflation
Interactions of above
+1,215
+1,192
+247
+252
+3,312
+2,800
+720
+808
Deficit with all of above
+5,347
+10,728
Baseline deficit
Source: CBO, The Budget and Economic Outlook: An Update, August 2010
Future Outlook
CBO: Baseline and Alternative Projections
Total deficit ($bil)
Baseline
Alternative
2011-15
3,202
5,347
Deficit/GDP (%)
Baseline
Alternative
2011
7.0
9.5
2015
2.7
5.1
2020
3.0
5.1
Debt/GDP (%)
Baseline
Alternative*
2011
66.1
68.6
2015
67.3
79.8
2020
69.4
91.0
* Author’s estimate
2011-20
6,246
10,728
Markets Not Spooked by Outlook
Interest rates not spiking
Dollar not plummeting
Inflation dormant
Why?
Debt/GDP high, but not excessive
Federal interest payments modest relative to
tax revenue
Strong demand for US dollar and public debt
Confidence in US problem-solving
Indicators of Confidence in Debt and Dollar
Federal Interest Payments, 1947Q1-2010Q2
Percent of Tax Receipts (excl. Social Insurance Taxes)
Yield on 10-Year U.S. Treasury Securities, 1953M4-2010M9
16
45
14
40
35
12
Percent
Percent
30
10
8
25
20
6
15
4
10
2
5
55
60
65
70
75
80
85
90
95
00
05
10
50
55
60
65
70
75
80
85
90
95
Year
Year
Source: Federal Reserve
Source: BEA, National Income Accounts
Foreign Exchange Value of the Dollar. 1973M1-2010M9
Broad Trade-Weighted Index
Inflation Rate, 1947Q2-2010Q2
GDP Deflator
140
00
05
10
00
05
10
15.0
12.5
120
10.0
7.5
Percent
Index
100
80
5.0
2.5
60
0.0
40
-2.5
20
-5.0
1975
1980
1985
1990
1995
2000
2005
2010
50
55
60
65
70
75
80
85
90
95
Year
Year
Source: Federal Reserve
Source: BEA, National Income Accounts
Total Public Debt as Percent of GDP, 2008
France
Germany
Japan
Sweden
UK
US
Source: CIA World Fact Book
68
64
173
37
52
61
What Is Responsible Public Debt/Budget Policy?
Mistaken analogies to private debt
Domestic public debt both liability and asset
We owe it to ourselves
Government immortal
Government has power to tax
Balance the budget?
Balance current budget, borrow for capital expenditures?
Balance the budget over business cycle?
Keep debt/GDP ratio at “safe” level?
Prospects for Expenditure Cuts and Tax Increases
Evolution of Federal Expenditures, 1947Q1-2010Q2
Federal Expenditures on Goods and Services, 1947Q1-2010Q2
Percent of GDP
Federal Tranfer and Interest Payments, 1947Q1-2010Q2
Percent of GDP
16
16
14
14
12
10
Percent of GDP
Percent of GDP
12
8
6
4
10
8
6
4
2
2
0
50
55
60
65
70
75
80
85
90
95
Year
05
10
0
50
55
60
65
70
75
80
85
90
95
Year
Source: BEA, National Income Accounts
Military
00
Civilian
Source: BEA, National Income Accounts
Transfers
Interest
00
05
10
Evolution of Federal Tax Rates, 1947Q!-2010Q2
Federal Personal Income Taxes, 1947Q1-2010Q2
Percent of Personal Income
Federal Corporate Profits Taxes, 1947Q1-2010Q2
Percent of Corporate Profits
13
70
12
60
11
10
Percent
Percent
50
9
40
30
8
20
7
6
10
50
55
60
65
70
75
80
85
90
95
00
05
10
50
55
60
65
70
75
80
85
90
95
Year
Year
Federal Indirect Taxes, 1947Q1-2010Q2
Percent of GDP
Federal Social Insurance Taxes, 1947Q1-2010Q2
Percent of Personal Income
3.5
00
05
10
00
05
10
9
8
3.0
7
6
Percent
Percent
2.5
2.0
5
4
1.5
3
1.0
2
0.5
1
50
55
60
65
70
75
80
Year
85
90
95
00
05
10
50
55
60
65
70
75
80
Year
85
90
95
Key Comparative Ratios, 2006
Taxes
to GDP
France
Germany
Japan
Sweden
UK
US
44
36
28
49
37
28
Income tax Consumption
to total tax*
to GDP
49
52
66
60
58
74
* Excluding property and social insurance taxes
Source: OECD
55
57
56
46
62
70
How to Burden Future Generations
Bequeath less capital
Bequeath a less educated, less healthy workforce
Bequeath less scientific, engineering, and managerial
knowledge
Bequeath fewer natural resources
Accumulate foreign debt to finance current
consumption or unprofitable investment