Transcript With appendices. - Harvard Kennedy School

US Fiscal Problems
Jeffrey Frankel
Harpel Professor of Capital Formation and Growth
Harvard Kennedy School
CEO/WPO Presidents’ Seminar
Harvard Business School
January 29, 2013
3 different US fiscal problems
• The long-term debt problem,
– dominated by rapid growth in entitlements,
without tax revenues to pay for them.
• The short/medium term problem: severe recession
in the aftermath of the 2007-08 financial crisis
– called for demand stimulus;
– which fiscal policy would have been suited to deliver,
• far more so than monetary policy.
• The short-term political problem:
– A succession of artificial “cliffs” and shutdown deadlines.
The US has mismanaged its finances as badly as Europe.
• without excuse of 17 legislatures, just 2 deadlocked political parties.
The US has a long-term debt problem.
National debt/GDP is the highest since WWII spike.
Source: CBO, March 2012
The US has a long-term debt problem, continued
• “Long-term” in the sense that debt/GDP
will rise alarmingly after the 2020s
– unless entitlements are put on a sound footing:
• Social Security & Medicare are due to run big deficits
– as the baby-boomers retire (predictably)
– and the cost of health care rises rapidly (unpredictably).
• Definition of debt sustainability:
– regardless the level of the debt, it is sustainable
if the future debt/GDP ratio is forecast to fall indefinitely.
US long-term debt problem, continued
Not sustainable
US long-term debt problem, continued
• The problem is not short-term:
– Far from tiring of absorbing ever-greater levels
of US treasury securities, global investors
continue happily to lend at record-low interest rates (2008-):
• The US enjoys safe-haven status; the $ enjoys “exorbitant privilege.”
– There is no fiscal crisis. The US is not Greece.
• We just want to be sure not to become Greece in 20 years.
• Indeed the federal budget deficit is coming down
• from 10 % of GDP in 2009 to 7 % in 2012.
– despite the continued weakness in the economy.
• Recent steps will bring debt/GDP down over 2014-18.
• 2011-13 $1.5 trillion in spending cuts
• + $0.6 tr. 1/1/2013 tax “increase” (relative to having let all Bush tax cuts expire).
Debt/GDP will probably decline over 2014 -18.
Center on Budget and Policy Priorities, Jan.9, 2013
http://www.cbpp.org/cms/index.cfm?fa=view&id=3885
CBPP recommends a further $1.2 tr. in spending cuts & tax rises to stabilize debt out to 2022.
But there is no need for it to hit this year.
That would send us back into recession, as the January 2013 fiscal cliff would have.
US long-term debt problem, continued
The debt problem is also “long-term” in the sense
that we have known about it a long time.
E.g., Ronald Reagan,
on taking office:
"For decades we have piled deficit upon deficit,
mortgaging our future and our children's future
for the temporary convenience of the present…
We must act today in order to preserve tomorrow.
And let there be no misunderstanding:
We are going to begin to act, beginning today.”
– Inaugural address, Jan. 20, 1981
Other advanced countries have the same long-term problem:
Rich countries’ Debt/GDP is the highest since the WWII spike.
Historic Role Reversal:
Public finances in Emerging Markets
have become much stronger since 2000
even while weakening in advanced economies.
World Economic Outlook, IMF, April 2012
Country creditworthiness is now inter-shuffled
“Advanced” countries
AAA Germany, UK
AA+ US, France
AA
Belgium
AA- Japan
A+
A
ABBB+ Ireland, Italy, Spain
BBB- Iceland
BB+
BB
Portugal
B
SD
Greece
(Formerly) “Developing” countries
Singapore, Hong Kong
Chile
China
Korea
Malaysia, South Africa
Brazil, Thailand, Botswana
Colombia, India
Indonesia, Philippines
Costa Rica, Jordan
Burkina Faso
S&P ratings, Feb.2012 updated 8/2012
The US public discussion is framed as a battle between
conservatives who philosophically believe in strong budgets
& small government, and liberals who do not.
Democrats, Republicans, & the media all use this language.
It is not the right way to characterize the debate.
[1]
• (1) The right goal should be budgets that allow
surpluses in booms and deficits in recession.
• (2) The correlation between how loudly an American
politician proclaims a belief in fiscal conservatism
and how likely he is to take genuine policy steps < 0.
[1] Never mind that small government is classically supposed to be the aim of “liberals,” in the 19th century definition, not “conservatives.”
My point is different: those who call themselves conservatives in practice tend to adopt policies that are the opposite of fiscal conservatism. I call them “illiberal.”
“Republican & Democratic Presidents Have Switched Economic Policies” Milken Inst.Rev. 2003.
Brief US fiscalhistory: The1980s
• The newly elected Reagan complained of the inherited debt:
– “Our national debt is approaching $1 trillion. …
A trillion dollars would be a stack of 1,000-$ bills 67 miles high.”
•
address to Congress, Feb. 18, 1981.
• Reagan’s actions: sharp tax cuts & rise in defense spending.
• The claim: budget surpluses would result.
• The reality: record deficits that added to the national debt
– a 2nd trillion in his 1st term
– a 3rd trillion in his 2nd term
– a 4th trillion when G.H.W. Bush initially continued the policies.
(“Read my lips, no new taxes.”)
US fiscal history, continued: The 1990s
• The deficits were gradually cut, and then
converted to surpluses by the end of the 1990s.
• How was this accomplished?
– Regime of “Shared Sacrifice” -- 3 key policy events.
• 1990: GHW Bush bravely agreed spending caps, taxes & PAYGO
• 1993: Clinton extended the policy.
• 1998: As surpluses emerged, “Save Social Security 1st.”
– Strong growth in late 1990s.
Fiscal history, continued: The 2000s
• The Shared Sacrifice regime ended
on the day G.W. Bush took office in Jan. 2001.
• He returned to the Reagan policies:
– Large tax cuts
– together with rapid increase in spending (triple Clinton’s)
• not just in military spending (esp. Iraq & Afghanistan),
• but also domestic spending: discretionary + Medicare drugs benefit.
• Just like Reagan, he claimed budget surpluses would result.
• Just like Reagan, the result was record deficits:
– The national debt doubled.
• I.e., GWB incurred more debt than his father + Reagan + 39 predecessors
Cyclicality &
Fiscal Policy:
• The question “What is the right fiscal policy,
Austerity or Stimulus?”
is as foolish as the question
“Should a driver turn west or east?”
• It depends where he is in the road.
– Sometimes west is the right answer, sometimes east.
• “The boom, not the slump, is the right time for
austerity at the Treasury.” - John Maynard Keynes (1937)
Collected Writings
Another respect in which many EMs
have improved their policies
since the crises of the late-1990s:
A shift from pro-cyclical fiscal policy to counter-cyclical
• They took advantage of the 2002-07 boom
to strengthen their budget positions,
• allowing them to run deficits
when the global recession hit in 2008-09.
• Some examples:
– China was able to respond with big stimulus.
– Chile, Korea, Malaysia, Botswana, Indonesia.
Cyclicality of Fiscal Policy
• During the same period when some EM governments
finally learned counter-cyclical fiscal policy (2000-12) ,
many Advanced-Country politicians forgot how to do it.
• Most conspicuously, Greece & other euro members
failed to reduce budget deficits
during years of growth, 2001-08
– and were then forced to cut spending & raise taxes
during the euro debt crisis of 2010-12,
• exacerbating recessions, even raising Debt/GDP.
• But the United Kingdom did the same,
– despite no euro-constraint forcing austerity in 2010-12.
Greece let its deficit rise during the growth years, 2001-08,
despite the 3% of GDP limit set by the Stability & Growth Pact
& then was forced into sharp austerity in 2010-12.
SGP floor
Source:
IMF, 2011.
I. Diwan,
PED401, Oct. 2011
19
Some US politicians have pursued pro-cyclical
(i.e., destabilizing) fiscal policy
1st cycle:
Recession: austerity.
• 1980-81: Reagan’s
speeches pledging action
to reduce the national debt
“beginning today” came
during a period of severe
recession.
Boom: profligacy.
• 1988: As the economy neared
the peak of the business cycle,
candidate George H.W. Bush
was unconcerned about
budget deficits:
• “Read my lips,
no new taxes.”
Some US politicians have sought pro-cyclical fiscal policy,
continued
2nd cycle
Recession: austerity.
• 1990: Predictably,
the first President Bush
summoned the political will
to raise taxes & rein in
spending (PAYGO)
at precisely the wrong
moment -- just as the US
entered another recession.
Boom: profligacy.
• 1993-2000: Despite the most
robust recovery in US history,
– 1993: all Republican congressmen
voted against Clinton’s legislation
to continue PAYGO etc.
– 2000: Even after 7 years of strong
growth, with unemployment < 4%,
George W. Bush campaigned on a
platform of tax cuts.
• 2003: After his fiscal expansion had
turned the inherited surpluses into
deficits, GWB went for a 2nd round
of tax cuts & continued a spending
growth rate 3 x Clinton’s.
–
VP Cheney: “Reagan proved
that deficits don’t matter.”
Some US politicians have sought pro-cyclical fiscal policy, continued
3rd cycle
Recession: austerity.
• 2007-09: Predictably, when the new
worst recession since the Great
Depression hit, Republican congressmen
suddenly re-discovered the evil of deficits,
deciding that retrenchment was urgent.
– They opposed Obama’s initial
fiscal stimulus in February 2009.
• 2011: Subsequently, with a majority
in the House, they blocked further efforts
by Obama when the stimulus ran out,
despite still-high unemployment.
Thus, through 3 cycles,
the efforts at tightening came during recessions,
followed by fiscal expansion
when the economy was already expanding.
Why do leaders fail to take advantage
of booms to strengthen the budget?
• People don’t see the need to “fix the hole
in the roof when the sun is shining.”
– They do see the mistake
when the storm hits,
• but then it is too late.
• Official forecasts
are over-optimistic in periods
of expansion, rationalizing
the failure to act.
Failure to take advantage of booms to strengthen the budget,
continued
• Budget balance rules are in fashion.
– EU: SGP, Debt brake, Fiscal compact.
– US: State budget limits;
Debt ceiling,
Proposed Balanced Budget Amendment.
• But they worsen the problem of over-optimistic forecasts.
– E.g., when euro members go above the 3% deficit ceiling,
• they adjust their forecasts, not their policies.
• The US has its own version
of biased forecasts.
Failure to strengthen the budget in booms,
continued
Official US forecasts in the 2000s
• White House forecasts were over-optimistic all along.
– OMB in Jan. 2001 forecast rapid rise in tax revenue,
• in effect assuming there would never be a recession.
– Four tricks to justify tax cuts, dating from the 1980s:
•
•
•
•
The Magic Asterisk
Rosy Scenario
Laffer Hypothesis
Starve the Beast Hypothesis
• Congressional Budget Office forecasts are honest.
– But the Bush Administration adopted new tricks,
– so that “current-law budget” would show future surpluses:
• continuation of Iraq & Afghan wars treated as a surprise each year
• phony sun-setting of tax cuts…
Where are we now, in January 2013?
• The political crisis:
• repeated partisan standoffs in Congress.
• To reduce the budget deficit:
• how far can we get by discretionary spending cuts?
• Where are the right places to squeeze,
• politics aside ?
Repeated partisan stand-offs in Congress
have each ended by “kicking the can down the road.”
• In the summer of 2011, “fiscal conservatives”
at first refused the usual debt ceiling increase,
– recklessly threatening government default.
– Political dysfunction led S&P to downgrade US bonds from AAA.
• “Fiscal cliff” deadline at the end of 2012
– risked fiscal contraction sharp enough
to cause a new recession.
Repeated partisan stand-offs, continued
• More self-inflicted deadlines coming up:
– Mar. 1: Postponed sequestration of discretionary spending hits
• $1.2 tr. over decade, ½ defense, ½ domestic.
– Mar.27: Government shutdown,
• unless Congress passes Continuing Resolution (like 1995).
– Apr.15: Both houses supposed to pass budget resolutions,
• to allow:
– May 18 : New debt ceiling,
(+)
• postponed from January 23, 2013.
• Grounds for hope:
each time, the hostage-takers lose a little more credibility.
The game of “Chicken”
In the 1955 movie Rebel
Without a Cause,
whoever jumps out of
his car first supposedly
“loses” the game.
James Dean does;
but the other guy
miscalculates and goes
over the cliff.
.
I think the Republicans
miscalculated,
in part because they asked for something impossible.
How far can we get by cutting spending?
• Total federal spending = $3 ½ trillion in round numbers.
• That spending minus tax revenue leaves
a budget deficit of $1.1 trillion in FY 2012,
• down from $1.4 trillion in 2009.
• Most Republican congressmen want to cut
only non-defense discretionary spending,
– to exempt defense & senior-related spending (Soc. Security & Medicare).
• That was their official platform in the 2010 election.
• How much would we have to trim non-defense
discretionary spending to balance the budget?
How far can we get by cutting spending? continued
• Start by eliminating PBS funding
• =1/10,000 of spending
• Then all foreign aid.
• = 1 ½ % of total outlays, not 25% as Americans think.
• Next, veterans’ benefits.
• The same. We are now up to a total of 3 % of outlays.
• Next imagine zeroing out all federal spending on farming,
science & environment, education & transportation,
• which includes programs too popular for congressmen to vote for.
• That is a total of $364 b = 1/3 of the 2012 deficit.
• Conclusion: Domestic discretionary spending
is not where the big bucks are.
• Would would also need to eliminate either all of defense,
– or all medicare payments
– or all social security payments
– while still collecting the social security taxes that are supposed to pay for it!
Eliminating all non-defense discretionary spending
(including also parks, weather service, food safety, SEC, FBI, border patrol,
politicians’ salaries… everything !)
would not come close to eliminating the budget deficit
Total ≈ ½ deficit
$92 b
$86 b
$61 b
$59 b
$56 b
$35 b
$30 b
$17 b
$6 b
Concord Coalition.
Data Source: CBO, Jan.2012
3 biggest spending categories:
Health, Social security, & Defense
{ Medicare
& medicaid
Concord Coalition.
Data Source: CBO, Jan. 2012
Breakdown of federal spending
Even if one could somehow eliminate all domestic spending,
it would not come close to eliminating the deficit
Budget deficit was $1.1 trillion in FY 2012
Outlays: $3.5 trillion
Deficit
$1.1 tr.
Tax
revenue
$2.5 tr.
Concord Coalition.
Data Source: CBO, Jan. 2012
Updated: http://cbo.gov/sites/default/files/cbofiles/attachments/2012_09_MBR.pdf
• 12 years ago, if the country thought it important enough
to protect any single category against belt-tightening
in the long run -- say military or social security or tax cuts for the rich -it would have been arithmetically possible,
by making the cuts elsewhere.
• But we no longer have the luxury of such choices
after the legacy of the last decade —
–
–
–
–
after the effects of mammoth tax cuts (2001 & 2003),
two wars (2001, 2003),
the Medicare prescription drug benefit (2003),
and the severe financial crisis & recession (2008).
• Starting from our current position, each of the 5
components must play a role, along with taxes.
If there were no political constraints…
• What steps should be taken today
to lock in future fiscal consolidation?
– Not by raising taxes or cutting spending today (new recession);
– nor by promising to do so in a year or two (not credible).
– There are lots of economically sensible proposals
• for spending to eliminate over time,
• more efficient taxes to switch to,
• and “tax expenditures” to cut.
How to reduce the budget deficit
The only way to do this is both reduce spending
& raise tax revenue, as we did in the 1990s.
• Spending.
Examples:
– Eliminate agricultural subsidies
– Cut manned space program
– Cut National Guard, Reserves, & unwanted bases
– Cut unwanted weapons systems
•
•
•
•
•
A rare success: the F22 Raptor fighter. Now F-35 Joint Strike Fighter? ($600b/10 yrs.)
Global Hawk Block 30 drone program?
The C-27J Spartan cargo aircraft?
Upgrades to the M1 Abrams tank
Virginia-class submarine? ($2.6 billion)
How to reduce the budget deficit
The only way is both reduce spending & raise tax revenue, continued.
• Tax revenue options
– We could have let G.W. Bush’s tax cuts expire in 2013.
– Can still curtail expensive & distorting “tax expenditures”
• E.g., Tax-deductibility of mortgage interest,
•&
of health insurance
• Subsidies to oil industry…
– Or launch more ambitious tax reform:
• Introduce a VAT, sales, or consumption tax
• or phase in an energy or carbon tax
– or auctioning of tradable emission permits
Distortionary subsidies hiding as tax expenditures
$128 b
$305 billion
$93 b
$84 b
Joint Committee of Taxation, Jan. 2012
The long-term problem is entitlements
Concord Coalition.
Data Source: CBO, Jan. 2012
• Social security
– Raise retirement age – just a little,
• perhaps exempting low-income workers.
– Progressively index future benefit growth to inflation.
– Optional options:
• To please Democrats: Raise the cap on social security taxes.
• To please Republicans: encourage private accounts
– though they contribute nothing to closing the gap.
42
• Health care
– Encourage hospitals to standardize
around best-practice medicine.
• Pay health providers for “value,” not per medical procedure.
• Standardize around best-practice treatment:
–
–
–
–
evidence-based (to be facilitated by electronic health records).
E.g., pursue the checklist that minimizes patient infections,
and avoid unnecessary medical tests & procedures.
That is not “death panels.”
• Levers to get providers to follow best practices:
– make Medicare payments conditional
– or protection from malpractice litigation.
– Curtail corporate tax-deductibility of health insurance,
–
especially gold-plated.
43
Background writings by Jeffrey Frankel on fiscal policy:
• On Graduation from Fiscal Procyclicality,” 2013, with C.Végh & G.Vuletin,
J. Developmt. Econ. Summarized in "Fiscal Policy in Developing Countries: Escape from Procyclicality," Vox.eu, 2011. NBER WP 17619.
• "Over-optimism in Forecasts by Official Budget Agencies and Its Implications,"
Oxford Review of Econ. Policy Vol.27, Issue 4, 2011, 536-62.
NBER WP 17239; Summary in NBER Digest, Nov.2011.
• "Small Countries, Big Ideas," Business Economics
(National Association of Business Economists), April 2012.
• “A Lesson From the South for Fiscal Policy in the US and Other Advanced Countries,”
Comparative Economic Studies. 53, no.3, Sept. 2011.
• “Snake-Oil Tax Cuts,” 2008, EPI, Briefing Paper 221. HKS RWP 08-056
Google “Jeffrey Frankel Harvard” for webpage
or blog
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/
http://ksghome.harvard.edu/~jfrankel/ Blog:
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/
Appendices
• I: American “fiscal conservatives”
are (mostly) not fiscal conservatives.
• II: Role reversal in Emerging Markets
• III: The long-term U.S. debt problem
– (1) Where did today’s deficits come from?
– (2) What will drive deficits in the future?
• IV: The short term
Appendix I: 3 pieces of evidence to support
the claim that US “fiscal conservatives” are not:
• (i) The voting pattern among the 258 Congressmen
who signed an unconditional pledge not to raise taxes:
– They had voted for more spending
than those who did not sign the pledge. [2]
• (ii) The pattern of spending
under different presidents.[3]
• (iii) The pattern of states whose Senators win pork
& other federal spending. [4]
•
•
•
[2] William Gale & Brennan Kelly, 2004, “The ‘No New Taxes’ Pledge,” Tax Notes, July.
[3] JF “Snake-Oil Tax Cuts,” EPI, Briefing Paper 221. 2008.
[4] JF Red States, Blue States and the Distribution of Federal Spending, 3/31/2010.
(ii) Spending & deficits both rose sharply when
Presidents Reagan, Bush I, & Bush II took office.
Vs. the 1990s: The Shared Sacrifice approach succeeded in eliminating
budget deficits, importantly by slowing spending.
Spending and Budget Balance(inverse) as % of GDP (Current US$)
15
Budget deficit
24
13
22
11
20
9
18
7
ρ = 0.86
5
16
1
G.W. Bush
W.J. Clinton
R. Reagan
G.H.W. Bush
10
Spending
-1
-3
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008 Est
2009 Est
2010 Est
12
J. Carter
14
3
Spending/GDP
Budget Balance/GDP
Source:
OMB
(iii) States ranked by federal spending received
per tax dollar
versus party vote ratio in preceding election
“red”
states
“blue”
states
big inflow of US $
Republican states take home
significantly more federal $
(relative to taxes paid)
than Democratic states.
low inflow of US $
Appendix II: Remarkable role-reversal
in fiscal policy among Emerging Markets
• Debt/GDP of rich countries (> 80%) is now
more than twice that of emerging markets;
• and rising rapidly.
+
• Even EM “debt intolerance” may be diminishing.
• ≡ creditworthiness for given debt/GDP -- Reinhart & Rogoff
=>
Some EMs Economies are now more creditworthy
than some Advanced Economies
•
• as reflected in credit ratings or sovereign spreads.
49
One indication of improved EM creditworthiness:
EM sovereigns used to have to pay higher interest rates
than many US corporates (BB), but now pay less.
World Economic Outlook, IMF, April 2012
Cyclicality of
Fiscal Policy
In the textbooks, benevolent governments are supposed to
use discretionary policy to dampen cyclical fluctuations,
expanding at times of excess supply, and
contracting at times of excess demand.
But in practice, …
Governments would raise spending in booms;
and then be forced to cut back in downturns
Copyright Jeffrey Frankel,
An important development -In the last decade, some developing countries
were able to break the historic pattern:
• They took advantage of the 2003-08 boom
– to run budget primary surpluses.
• and build reserves.
• By 2007, Latin America had reduced its debt
• to 33% of GDP,
• as compared to 63 % in the United States.
• And so had fiscal space
to respond to the 2008-09 recession.
• I.e., some emerging market countries finally
achieved countercyclical fiscal policies.
US debt > big EMs
but < some other advanced countries
http://www.marketobservation.com/blogs/media/blogs/Statistics/DebtGDP.jpg
Correlations between Gov.t Spending & GDP
1960-1999
Adapted from Kaminsky, Reinhart & Vegh, 2004,
“When It Rains It Pours”
procyclical
Pro-cyclical spending
countercyclicall
Countercyclical
spending
G always used to be pro-cyclical
for most developing countries.
Correlations between Gov.t Spending & GDP
2000-2009
procyclical
Frankel, Vegh & Vuletin (2011)
countercyclical
In the last decade,
about 1/3 developing countries
switched to countercyclical fiscal policy:
Negative correlation of G & GDP.
To summarize the fiscal role reversal,
• Many Emerging Markets countries have,
so far this century, achieved:
– Lower debt levels than advanced economies;
– improved credit ratings;
– lower sovereign spreads; and
– less pro-cyclical fiscal policies.
Most Emerging Market countries learned
from the debt crises of the 1980s & 1990s.
But many leaders in advanced economies
failed to do so.
• They thought it could never happen to them -• most notably, leaders of euroland,
– even after the periphery countries
violated the deficit & debt ceilings
of Maastricht and the SGP;
– And even after the Greek crisis hit in late 2009 .
But Reinhart & Rogoff remind us: sovereign default
is an old story, including among advanced countries –
This Time is Different, updated in “From Financial Crash to Debt Crisis,” 2010
Sovereign External Debt: 1800-2009
Percent of Countries in Default or Restructuring
50%-
1830s
1870s
1930s
1980s
Sources:
Lindert & Morton (1989), Macdonald (2003), Purcell & Kaufman (1993), Reinhart, Rogoff & Savastano (2003), Suter (1992), and Standard & Poor’s
(various years). Notes: Sample size includes all countries, out of a total of sixty six listed in Table 1, that were independent states in the given year
Carmen Reinhart & Kenneth Rogoff
found a growth threshold in Debt/GDP of 90%.
GDP
growth
Debt/GDP
< 90%
MoneyHoney blog, Feb.20, 2010
‘Growth in a Time of Debt’
The historic role reversal
• Debt levels among rich countries (debt/GDP ratios > 80%)
by 2008 reached twice those of emerging markets.
• Some emerging markets have earned credit ratings
higher than some so-called advanced countries.
• Over the last decade some emerging market countries
finally developed countercyclical fiscal policies:
• They took advantage of the boom years 2003-2007
– to run primary budget surpluses and cumulate reserves.
• By 2007, Latin America had reduced its debt to 33% of GDP,
– vs. 63 % in the US.
– And so were able to respond to global recession of 2008-09 .
60
The Greek budget deficit
never got below the 3% of GDP limit,
nor did the debt ever decline toward the 60% limit
61
Appendix III:
The Long-term debt problem
• (1) From where did today’s debt come?
• (2) What will drive debt in the future?
– The problem is not budget deficits
in the next few years.
– The problem is the far larger increases in
entitlement programs based on current promises
• Social security
• Medicare & other health programs
As of 2000, Debt/GDP had been on a
declining path. What changed?
(1) From where did
today’s debt come?
$13 trillion in 2011 debt,
relative to 2001 official projection
}
Wars in Iraq &Afghanistan (so far)
}
Bush tax cuts (which were
supposed to expire in 2011)
}
Over-optimistic economic
assumptions in 2001, e.g., growth rate
Source: The Great Debt Shift:
Drivers of Federal Debt Since 2001,
Pew Charitable Trust.
Fiscal stimulus {
in response to
the recession
accounts for < 1/3
of 2009-11 deficits
and has virtually
disappeared by now.
{
Obama
stimulus
CBPP, May 2011
(2) The long-term problem
Appendix IV: The short term
Budget deficits have declined since 2009.
Jan. 2013 fiscal cliff:
Letting the Bush tax cuts expire
on schedule would have stabilized debt/GDP
CBPP, May 2011
U.S. fiscal policy in 2013
• If we opt for short-term fiscal stimulus,
– or at least on counteracting the current fiscal contraction,
• what form should it take?
• Renew some elements of the Obama stimulus
– such as infrastructure investment (roads & bridges)
– & giving money to the states
• so that they can re-hire laid-off teachers, policemen,
firemen, subway drivers & construction workers
– as in the Jobs Bill that the Congress voted down.
US Fiscal Problems
Jeffrey Frankel
Harpel Professor of Capital Formation and Growth
Harvard Kennedy School