Wednesday, October 15, 2008

A $1 Trillion Dollar Deficit?

Consider the following two stories:

Democrats Looking At Fiscal Stimulus:

House Speaker Nancy Pelosi is mulling recommendations from several economists that Congress act on an economic-recovery package that would cost taxpayers $300 billion, according to congressional aides, equivalent to about 2% of the country's gross domestic product.

The California Democrat envisions a bill that would include new spending on highways and bridges, extended benefits to unemployed workers, aid to cash-strapped states and a tax cut, congressional aides said. She has asked several House committees to examine details of a possible plan. And as part of the effort, Federal Reserve Chairman Ben Bernanke is expected to testify next week before the House Budget Committee on the state of the economy. Ms. Pelosi is expected to call lawmakers back to Washington in late November to take up the issue.

Federal Budget Deficit Could Hit $1 Trillion:

As bad as 2008 was, the current fiscal year, which began Oct. 1, is widely expected to be far worse. The director of the Congressional Budget Office recently estimated the annual deficit could hit $750 billion given the potential impacts from a possible recession and the financial markets' problems. Some private economists put the 2009 deficit at as much as $1 trillion.

On Tuesday, the White House budget office said the hole will look much deeper because accounting rules will force the administration to include all $250 billion of its bank recapitalization plan in the annual deficit as well. Under the Treasury's original plan -- focused on buying up troubled mortgage-related debt instruments from banks -- the government was expected to be able to exclude much of its spending from the annual deficit.

Let's look at a few basic points in no particular order of importance.

1.) According to the latest GDP report, government spending accounted for 28% of the second quarters 2.8% growth rates.

2.) According to the CBO's historical budget data, the total federal budget was $2.7 trillion in 2007. According to the BEA, the total US GDP was $14.9 trillion in the second quarter of 2008. That means the federal government's budget represents 18.12% of US GDP.

3.) Basic Keynsean economic theory states we can use the federal government budget to ameliorate the effects of the business cycle.

In theory, I have no problem with the idea of spending on infra-structure etc... These are "public goods":

In economics, a public good is a good that is non-rivaled and non-excludable. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good.[1] In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.

Here's the problem: as we try and get out of a recession we have to spend money. This is a similar proposition to the saying, "the only way to make money is to spend money." However, the federal government has been run by morons these last 8 years. Consider the following table. It shows the total amount of US government debt outstanding.

09/30/2008 $10,024,724,896,912.49
09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

The current amount of government debt outstanding is $10,294,381,432,306.11

If we had prudently managed the nation's finances during times of plenty, issuing tons of debt would not be an issue. However, the US issued $1 trillion of public and private debt last year. That means as we go through this recession and issue a ton of paper at the federal level we run increased risks of higher interest rates to attract the necessary financing.