Your Lying Eyes

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20 February 2013

Do Deficits Matter?

Maybe not. Back when the deep 1981-82 recession along with Reagan's tax cuts combined with increased military led to big budget deficits, his apologists claimed deficits didn't matter. Now, it's the Obama supporters making this claim. The argument is that deficit spending is critical to economic growth right now, and that low interest rates prove it's not much of a problem anyway. But if we need deficits to promote growth, we're not getting much bang for the buck right now. Compare the growth in GDP to the deficit for each quarter of this recovery:
With the exception of Q1 2011 and Q3 2012, the deficit has actually exceeded the growth in GDP - usually by a huge margin. So the deficit isn't encouraging economic growth, but instead masking economic contraction. But is this normal in a recovery? Not hardly! Compare this recovery to the one following the very deep 19821-82 recession:
Despite it's reputation for historic deficits, the Reagan deficits were were typically well below GDP growth and only exceeded it in two quarters. The Reagan apologists certainly were on much firmer ground than Obama's. In the 14 months of this recovery, each $1 of deficit spending has purchased only 45 cents of economic growth. In comparison, in the 80's recovery, we got $1.63 of additional GDP for each dollar of additional debt.

I would say that the term "unsustainable" is a fair assessment of our current fiscal situation. The deficit apologists are basically making the novel argument that doing something that provides merely short-term relief of pain can't really present a long-term problem because it hasn't hurt us yet!

Deficits: U.S. Treasury -
GDP: Bureau of Economic Analysis -


Anonymous Anonymous said...

I still don't understand why this economy just keeps getting crappier.

March 01, 2013 12:41 PM  
Blogger Unknown said...

In the US, the potential danger is not public sector debt -- it is private sector debt, and the damage has already been done.

The point of the historic federal deficit level is not to spur growth per se right now -- that will not happen -- but to avoid disaster: the Japanese disease, in which GPD is moribund or reducing for decades as the private sector incessantly seeks to de-leverage, but cannot finance its desire for savings.

Consumers have been reducing consumption dramatically to pay off debt and build savings. The losses in consumption will either by absorbed by reduced private production or increased government consumption in the form of the deficit. One of these is a real problem, the other is nominal obligation, although it is potential long-term problem if the government is a less efficient investor. That said, the consumer is in no position to invest much for quite awhile.

Until private sector credit expansion picks up -- and there are faint suggestions it might be -- the question is not if our public spending is encouraging growth but whether it is helping to avoid contraction.

To the commentator above, the malaise is attributable to the collapse in consumer savings.

March 07, 2013 9:26 PM  
Blogger ziel said...

Consumers have been reducing consumption dramatically to pay off debt and build savings

You act like this is some odd phenomenon, like a tsunami, that's just kind of happened and so public spending is needed to step in to fill the void.

On the contrary, the deleveraging is a necessary pre-requisite to any kind of meaningful recovery, but the Fed and the USG won't let that happen.

Deep recessions are necessary to correct grotesque imbalances like the housing/equity bubble of the last decade. Unfortunately, the Fed began pumping the financial sector before any meaningful correction occurred.

So we will have this moribund growth, as you aptly described it, for decades on end. Perhaps such anemic growth was structurally inevitable, what with the dumbing down of our population, but it's guaranteed now.

March 08, 2013 8:57 AM  

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