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November 18, 2009



Well, it's certainly a real problem, but this graph isn't the best one to provide the proper perspective. Real per capita GDP in 2009 is twice what it was in 1969, which in turn was quite a bit larger than it was in 1949. On a percentage basis the graph wouldn't be so ominous.


It's also worth noting that federal government expenditures grew by about 42% (in real terms) between Q1 2001 and Q4 2008 while GDP only grew by about 16%. Considering that taxes actually fell as a proportion of GDP during that time, of *course* we're going to have huge deficits as far as the eye can see. The largely pretend economic activity of the real-estate bubble obscured the size of the growing shortfall, but the problem has been developing for years and now the bill is starting to come due. Will the government pay it? I don't see any signs of it so far, though that the administration is wary of telegraphing austerity measures while the recovery is still shaky.

In any case, I continue to see this as more of a stability issue (i.e. a threat to exchange rate and financial market balance) than a straight-ahead fiscal issue. Sure, it sucks to have to pay back loans, but we're not yet into territory untrod by other major economies.

Nathan Smith

Does the "42%" growth in spending include the TARP? If so, that's misleading, since most of the TARP will be paid back, and it was always a one-off expense in the worst case. Nato's attempt to shift the blame to Bush is unpersuasive. As the chart shows, the surge in real federal debt per capita is occurring precisely under Obama-- and Obama's policies are NOT one-off expenditures, let alone do they have the prospect of paying back; rather, they create new entitlements that will get worse in future.

To call the economic activity associated with the housing bubble "largely pretend" is questionable. For one thing, not all the gains in home prices have been lost. For another, the houses were built, even if they turned out to be worth less than was hoped. And if Bush's immigration reform had gone through housing prices wouldn't have fallen so much. Unemployment in the Bush years was 5-6%, or even less. Now it's 10%.

Nato is right that economic growth enables us to sustain a larger per capita debt burden over time. But the economy is hardly growing right now. Even if it resumes growing, and if the political class balances the budget after 2012-- a huge if-- it would take us 20 years or so to bring the debt/GDP back to what Bush left us.

Bear in mind that the grim scenario shown in the chart above can be averted if we change course to reduce the deficit soon.


Let me put it another way. Clinton's final budget request (2000) was ~1.9 trillion. Bush's (2008) was 3.1 trillion. That's not TARP-related, because it hadn't been envisioned yet. Further, if the economy suddenly gets worse, it naturally reduces revenues and increases expenditures. Most of the "sudden" explosion in deficits is a reevaluation of probable future revenues and the expense of already-extant programs. Sure, fiscal stimulus just throws fuel on the fire, but it's not like Obama's new spending is the main cause of the gigantic projected deficit. The cause, in that respect is that instead of reducing expenditures and entitlements to reflect lower revenues and greater expenses, the government has increased spending in a bid to counteract the pain of a burst bubble.

$3 trillion in heavily-leveraged* real-estate assets disappeared in the bust, an amount equivalent to erasing all economic growth from 2004 through the height of the bubble in 2007. That's crushing. It's certainly not Bush's fault, but it does mean that the government was increasing expenditures based on an apparent economic boom that was in important respects illusory. Really, they were excessive even if that growth had been real! We were still running large deficits even when revenues were high and costs were lower. Of course when a bust this big arrives we'll suddenly find ourselves deep in the hole. That's what I'm saying.

If the 2010 budget rolls in and there's no shifts on matching revenues and expenditures, *then* it will be time to panic.

*As opposed to equities, which are generally just owned outright.

Nathan Smith

Good points... I guess the difference is that whereas during the Bush administration it wasn't obvious that the nation was on an unsustainable course, now it is obvious, and yet Obama is still pushing proposals that increase spending, especially health care reform. Still, Bush too should certainly have known better.

Wouldn't it be nice if we could get the government we had in the 1990s back?


"Bush too should certainly have known better"

Maybe in terms of increasing spending so fast, though I can't really expect him to have known to discount the apparent boom when considering how to match ins and outs.

"Wouldn't it be nice if we could get the government we had in the 1990s back?"

We may yet get it, depending on how these next elections go. I just hope it's the party of McCain in opposition rather than the party of Palin.

Nathan Smith

We may indeed get the Democratic President/GOP Congress combination of the late 1990s, but they're unlikely to bring government spending down to $3 trillion, let alone $2 trillion. The most that seems plausible to hope for is that the burden of government will stop growing, not that it will be rolled back.

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