If this years budget deficit was 3.6 trillion but led to 8% growth...

[Kurt_and_Hunter]

The current deficit is $1.6 trillion (I think... that's from memory of the news)

US economic growth going forward is expected to be in the 3% range for a long time and unemployment expected to be high (7.5%+) for years.

Okay, a hypothetical...

If this year's budget added $2 trillion in job creation and economic stimulus and the result was GDP growth of 8% in 2011 and 6% in 2012 and some points cut off unemployment how would that affect the deficit and debt in 2014? How about in 2018?

Government revenues are dynamic, not static. In practice GDP is a greater driver of revenue than abstract tax rates. (Repealing the bush tax cuts will generate a hell of a lot more revenue in an environment where people are working and spending and booking profits.)

My instinct is that a stimulus blow-out this year would not make the long-term deficit and debt much worse and would stand a real chance of reducing deficit and debt in the long term, and perhaps even in the medium time-frame.

(Yes, I know this will not happen. The question is about ideal policy, not predicting what congress will actually do.)

Comments?

[NoNothing]

1. Theoretically, yes

I think growth rates of 6-8% are really, really unlikely regardless of stimulus, though. The U.S. is a postindustrial economy, which tends to grow at 3-4% max.

[taught_me_patience]

2. Currently tax receipts are 16% of GDP

2.3T/14T or so. So, if you add 8%, GDP would be approx 15T. Additional tax receipts would be 160B. Therefore, you're 1.6T deficit, to increase tax receipts 160B. Not a smart economic move. The 8% growth rate assumption also seems pretty "optimistic".

[Kurt_and_Hunter]

7. You are assuming zero private sector response

The question isn't limited to taxes collected on growth directly supported by government outlays. Yes, that will be negative in every scenario.

My assumption, for purpose of argument, is that stimulus actually stimulates. I am suggesting that in the context of incredible and concentrated stimulus that there would be some hope of the private sector reviving.

A normal recovery from a bad recession features rather spectacular short-term GDP growth in a return to trend. We currently face an environment where no such explosion is anticipated by anyone I know of.

Current assumptions are that the private sector will never do anything dramatic.

Without private sector contribution I don't see how we can possibly avoid even worse debt/deficit trends.

So the question becomes whether a staggering kick in the economic ass up front has the chance of restarting more private sector activity and, if it could, whether that is a good gamble even from the deficit-hawk position.

My thinking is that as a risk/return proposition I am having a difficult time seeing an extra $2 trillion on the debt as outweighing the effects of an actual recovery of some sort. (As a percentage of the debt it's less staggering.)

My fear is that constant operation on the short side of truly dramatic is penny-wise pound-foolish insofar as we cut off the potential top end pre-emptively. Had Japan concentrated stimulus up front rather than kicking in politically acceptable levels year after year they might have avoided much of the lost decade while spending the same or less.

Put another way, if in late 2008 we decided as a society that we had a $5 trillion stimulus budget what would the right approach be? I would say that blowing it out upfront in a jump-start effort offers a better risk/return than parceling it out over a decade in amounts just small enough to not change the game in the private sector.

Granted, a massive jump-start might not catch. It is unknowable, given our unique circumstances. But if there is a fighting chance of human, economic and government balance sheet health and the downside is a national debt of $19 trillion versus $17 trillion it seems something worth talking about.

I am also factoring in an assumption that we are not going to actually get a handle on the deficit in a 3% growth decade starting w/ 10% unemployment.... I expect a long-standing problem of smaller annual loses.

I appreciate your thoughtful and knowledgeable reply. One other note; during the stimulus debate many folks were using revenue recovery figures in the 25-30% range. I don't know what combination of revenue and cost-saving (like reduction in assistance for the unemployed) that assumed, but it seemed to be more than just taxation.

[taught_me_patience]

10. I don't think a massive stimulus can stimulate long term demand

and capital investment requires a long term expectation of rising demand, due to the long pay-off times of these investments. Monetary easing would be much more effective in stimulating demand because it incentives consumers to spend, rather than save. A couple hundred billion of "monetary easing" by the fed has probably done much more to simulate demand than the stimulus. Of course, savers and retirees are getting screwed. There are no free lunches in the economy.

Now, a massive "jump-start" is incredibly risky. It's probably akin to "going all in" in poker. If it doesn't work, the economy is done. Also, we don't know the effect of selling so much government debt would be on interest rates. Likely, they would have to rise, stifling future economic growth.

[Kurt_and_Hunter]

12. Excellent answer, but the "all in" problem isn't that dire

There US economy wouldn't be all-in, merely a range of solutions. If it failed it would not doom the US, it would just mean our national debt was 19 instead of 17, or whatever the number is these days. (Hard to keep up.)

That would suck, of course, but it wouldn't be fatal in the manner of an actual all-in.

The OP is mere musing of course, but around a problem I am seeing as almost beyond solution. We are going to incur that debt and more in a lost decade and nobody is expecting robust growth.

I do not think a one-time infusion (which could be timed however macro-boys thought best for the objective... if it's thee years then it's three years, and how the money is used similarly open to best answers) would create long-term demand but it could conceivably ameliorate drags on such demand developing organically, particularly employment and housing.

Or not.

The cost of finding out would be unacceptable in my mind were I not sure that we will continue to hemorrhage debt on our current path.

An aside, speaking of long-term expectations... Krugman's work on Japan came to the conclusion that the right answer was for the central bank to allow inflation to develop and to publicly promise that it would not fight it much when it did. But no central bank is likely to do that.

[leveymg]

3. 2009 US GDP didn't grow 8%. It grew .1% (flat) after declining -1.9 in 2008

Q1 (-)5.7
Q2 (-)2.1
Q3 (+)2.2
Q4 (+)5.7

BEA - http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

EMBARGOED UNTIL RELEASE AT 8:30 A.M. EST, FRIDAY, JANUARY 29, 2010
BEA 10-02


* See the navigation bar at the right side of the news release text for links to data tables,
contact personnel and their telephone numbers, and supplementary materials.

Lisa Mataloni: [phone] (GDP)
Recorded message: [phone]

GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2009 (ADVANCE ESTIMATE)


Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009,
(that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the
Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on
source data that are incomplete or subject to further revision by the source agency (see the box on page
4). The "second" estimate for the fourth quarter, based on more complete data, will be released on
February 26, 2010.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from
private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which
are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private
inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that
were partly offset by decelerations in federal government spending and in PCE.

Motor vehicle output added 0.61 percentage point to the fourth-quarter change in real GDP after
adding 1.45 percentage points to the third-quarter change. Final sales of computers subtracted 0.03
percentage point from the fourth-quarter change in real GDP after subtracting 0.08 percentage point
from the third-quarter change.
_______________________________

FOOTNOTE.--Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise
specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent
changes are calculated from unrounded data and are annualized. “Real” estimates are in chained (2005)
dollars. Price indexes are chain-type measures.

This news release is available on BEA’s Web site along with the Technical Note and Highlights
related to this release.
_______________________________

The price index for gross domestic purchases, which measures prices paid by U.S. residents,
increased 2.1 percent in the fourth quarter, compared with an increase of 1.3 percent in the third.
Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in
the fourth quarter, compared with an increase of 0.3 percent in the third.

Real personal consumption expenditures increased 2.0 percent in the fourth quarter, compared
with an increase of 2.8 percent in the third. Durable goods decreased 0.9 percent, in contrast to an
increase of 20.4 percent. Nondurable goods increased 4.3 percent, compared with an increase of 1.5
percent. Services increased 1.7 percent, compared with an increase of 0.8 percent.

Real nonresidential fixed investment increased 2.9 percent in the fourth quarter, in contrast to a
decrease of 5.9 percent in the third. Nonresidential structures decreased 15.4 percent, compared with a
decrease of 18.4 percent. Equipment and software increased 13.3 percent, compared with an increase of
1.5 percent. Real residential fixed investment increased 5.7 percent, compared with an increase of 18.9
percent.

Real exports of goods and services increased 18.1 percent in the fourth quarter, compared with
an increase of 17.8 percent in the third. Real imports of goods and services increased 10.5 percent,
compared with an increase of 21.3 percent.

Real federal government consumption expenditures and gross investment increased 0.1 percent
in the fourth quarter, compared with an increase of 8.0 percent in the third. National defense decreased
3.5 percent, in contrast to an increase of 8.4 percent. Nondefense increased 8.1 percent, compared with
an increase of 7.0 percent. Real state and local government consumption expenditures and gross
investment decreased 0.3 percent, compared with a decrease of 0.6 percent.

The change in real private inventories added 3.39 percentage points to the fourth-quarter change
in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased
inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter
and $160.2 billion in the second.

Real final sales of domestic product -- GDP less change in private inventories -- increased 2.2
percent in the fourth quarter, compared with an increase of 1.5 percent in the third.


Gross domestic purchases

Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever
produced -- increased 5.1 percent in the fourth quarter, compared with an increase of 3.0 percent in the
third.

Disposition of personal income

Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter,
compared with an increase of $35.1 billion (1.2 percent) in the third.

Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of
$3.5 billion in the third.

Disposable personal income increased $130.8 billion (4.8 percent) in the fourth quarter,
compared with an increase of $31.6 billion (1.2 percent) in the third. Real disposable personal income
increased 2.1 percent, in contrast to a decrease of 1.4 percent.

Personal outlays increased $109.0 billion (4.2 percent) in the fourth quarter, compared with an
increase of $132.3 billion (5.2 percent) in the third. Personal saving -- disposable personal income less
personal outlays -- was $516.9 billion in the fourth quarter, compared with $495.0 billion in the third.
The personal saving rate -- saving as a percentage of disposable personal income -- was 4.6 percent in
the fourth quarter, compared with 4.5 percent in the third. For a comparison of personal saving in
BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow
of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-
Frb.asp.


Current-dollar GDP

Current-dollar GDP -- the market value of the nation's output of goods and services -- increased
6.4 percent, or $221.3 billion, in the fourth quarter to a level of $14,463.4 billion. In the third quarter,
current-dollar GDP increased 2.6 percent, or $90.9 billion.

2009 GDP

Real GDP decreased 2.4 percent in 2009 (that is, from the 2008 annual level to the 2009 annual
level), in contrast to an increase of 0.4 percent in 2008.

The decrease in real GDP in 2009 primarily reflected negative contributions from nonresidential
fixed investment, exports, private inventory investment, residential fixed investment, and personal
consumption expenditures (PCE), that were partly offset by positive contributions from federal
government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The downturn in real GDP primarily reflected downturns in nonresidential fixed investment and
in exports and a larger decrease in private inventory investment that were partly offset by a larger
decrease in imports and a smaller decrease in residential fixed investment.

The price index for gross domestic purchases increased 0.1 percent in 2009, compared with an
increase of 3.2 percent in 2008.

Current-dollar GDP decreased 1.3 percent, or $182.7 billion, in 2009. Current-dollar GDP
increased 2.6 percent, or $363.8 billion, in 2008.

During 2009 (that is, measured from the fourth quarter of 2008 to the fourth quarter 2009), real
GDP increased 0.1 percent. Real GDP decreased 1.9 percent during 2008. The price index for gross
domestic purchases increased 0.6 percent during 2009, compared with an increase of 1.9 percent during
2008.

_____________________________

BOX.
Information on the assumptions used for unavailable source data is provided in a technical note
that is posted with the news release on BEA's Web site. Within a few days after the release, a detailed
"Key Source Data and Assumptions" file is posted on the Web site. In the middle of each month, an
analysis of the current quarterly estimate of GDP and related series is made available on the Web site;
click on Survey of Current Business, "GDP and the Economy."

_____________________________

* * *


BEA's national, international, regional, and industry estimates; the Survey of Current Business;
and BEA news releases are available without charge on BEA's Web site at www.bea.gov. By visiting the
site, you can also subscribe to receive free e-mail summaries of BEA releases and announcements.


* * *

[johnaries]

5. Ah, but it is increasing. Look how much it increased in the 4th Q

vs 1st Q.

But regardless of the actual amount, in general as the economy rebounds Federal revenues will increase as well. Which, I believe, is the OP's point.

[On the Road]

4. If it Were a One-Year Deficit

it would probably be worthwhile in terms of future growth and tax revenues.

In practice, large budgets tend to take years to work down and the cumulative debt would likely be an additional $10T or more. That would put the debt into some scary territory and IMO not be worth it.

Provided that the economy starts to return to moderate growth over the next couple quarters, I would prefer to see stimulus provided by monetary policy even at the risk of some inflation.

[Zynx]

6. If the deficit was 3.6 trillion, I think that actually would have an impact on financial markets.

I don't think they would stomach that. We're probably a several hundred billion from a tipping point, but we're uncomfortably close. Fundamentally it shouldn't be a problem, but bond traders and credit rating analysts have become unusually ideological of late.

[Kurt_and_Hunter]

8. On what basis?

Why would anyone freak? The global supply of bonds is actually down, not up. (Global reduction in private borrowing.)

What supports the assumption that the bond market must crack at some nearby deficit point other than an idealogical conviction that it must?

The Fed printed money 24/7 last year... surely the most inflationary year of monetary policy since WWII. It was stated by many that this required an inflationary response (even hyper-inflationary) based on common sense.

But, as with bonds, the predicted effect didn't materialize and actually the opposite happened.

We are struggling to create inflation and failing.

The current environment is so unlike the 1980s or the 1990s that I don't get the need to plug-in factors as if we were in a normal situation.

The best measure of the bond market is the bond market, not assumptions about the bond market based on its behavior in very different environments.

A collapse of the dollar would raise rates uncomfortably, but why assume a collapse of the dollar because the national debt is 77% of GDP versus 82% of GDP?

Japan's debt is 125% of GDP and I never hear about how the world refuses to buy Japanese bonds, but then Japan doesn't have our political culture that attributes moral dimension to monetary policy demands that God strike down certain bad behaviors.

IMO.

I may be wrong but I sure haven't seen anything to convince me that we are near any sort of credit precipice.

[Zynx]

9. The issue is not so much an immediate one, but rather that when conditions normalize the total

supply of bonds would be distorted by a significantly larger Treasury bond supply that presumably would not have come down yet. I think the impact of higher government debt levels causing marginally higher corporate bond rates only occurs when quantum changes occur. In the case of another $2 trillion, I think you might actually cross that point. That is not an insignificant sum, particularly once economic growth and credit conditions become normalized.

As for the analogy to the Fed printing money at a rapid rate, the reason that did not have an impact was that monetary velocity collapsed in remarkable fashion. Monetarists can't accept the notion that velocity isn't a constant, but Keynesians know it is not. This was proved in spades in 2008-2009. Had velocity not been crushed by both a plunge in consumer demand for loans and banks' willingness to lend, that increase would have indeed caused hyper-inflation (though probably only of the 20-25% variety and not the 2000% variety). It will take a long time for velocity to come back and thus the Fed can mop up the excess in short order.

If we take on too much debt, however, it is not so easy for us to mop it up. The economic growth caused by debt financing does not pay for itself. Assume that you keep taxes at a constant 25% of GDP. For every dollar of new deficit spending you take on, you need GDP to increase by $4 to pay for it. This has always been the fallacy of the supply-siders.

I would support another $300 or $400 billion in stimulus, but much beyond that we need to start taxing less productive elements of the economy to pay for economic stimulus. For example, increasing the top marginal rate to 50% to pay for more infrastructure programs and work relief programs would transfer resources from lowly productive areas to more highly productive ones.

[Kurt_and_Hunter]

11. That's a good informed answer. Thanks.

I don't think 2 trillion would change the game but I certainly concede that some amount of money would... eventually.

But we are going to borrow all that and more if we have ten years of flat growth. The very factors you describe will most likely come into play a few years down the road without us ever having taken an experimental shot at restoring a high level of economic activity.

With experiment being very much the word. No one knows what it would do and the formulas wouldn't be much help, given the scale of the thing and the atypical context.

My big problem here is that we are going to rack up astonishing debt no matter what we do. Keep up the disaster relief disguised as stimulus and piss away money forever, go on a cost-cutting binge and probably fall back into recession, split the difference and drift...

In every scenario that doesn't feature strong growth we will continue sinking deeper. And fiscally, strong growth tomorrow is worth much more than strong growth next month.

So the economy recovers, for real, on its own. It could happen, but is anyone expecting that? Or else some fiscal stab is made at a front-loaded jump-start.

Or, as you propose, a fiscally neutral de facto stimulus regime based on artful redistribution of wealth into more economically useful hands and uses.

I have no problem with that. I even applaud it. But it has the defect of being even more politically impossible than blowing out two trillion dollars. You are talking about an entirely different approach that requires wisdom, resolve and a whole new philosophy.

I am too pessimistic about our system to imagine it.

But I have no doubt it is an excellent answer, as long as we are talking about the politically far-fetched. (Unlike something very likely like blowing 2 trillion on hats and ice cream.)

:hi: