Debt, Deficits & Alternatives
There are three means of reducing deficits: (1) reduce spending, (2) increase taxes and (3) expand economic growth. Discussions on the debt ceiling and the resulting legislation focused on the first two and completely ignored the third.
If taxes and spending remained unchanged and the US economic growth rate was 3.9%, the deficit would drop from 100% of GDP to 83% of GDP in ten years. If the growth rate were only 1.8%, deficits would increase to 144% of GDP in ten years. The economic growth rate has enormous impact on the deficit. The US growth rate was 0.8% in the first half of 2011.
The primary factor in balancing the budget during the Clinton presidency was an economic growth rate of 4.0%. The greatest threat to the US Government deficit
is a sustained period of slow growth. The debt ceiling package passed by Congress this month increases the probability of a sustained period of slow economic growth.
Despite what some politicians say repeatedly, TARP and the Economic Stimulus Package prevented the recession from becoming worse and unemployment becoming higher. Credible econometric models predicted that the unemployment rate would have risen to more than 15% without those programs. Dan Akerson, GM’s CEO, said TARP saved over one million jobs in the auto industry and GM is again the largest auto producer in the world. The Stimulus Package saved millions of jobs, particularly at the state level.
Unfortunately, the Stimulus Package was far too small for the magnitude of the economic problem. Also, unfortunately, President Obama said the Stimulus Package would keep
unemployment under 8.5%. Despite his forecasting error, the Stimulus Package had positive results. Nevertheless, another Stimulus Package is unlikely because so many politicians called the first package a failure.
Asian countries responded the recession quite differently. To counteract the recession
they engaged in massive fiscal stimulus programs in transportation, education,
energy and housing. The resulting economic growth rates in 2010 were as follows:
- China grew 10.3%
- India grew 8.2%
- South Korea grew 6.1%
- Taiwan grew 10.8%
- Singapore grew 14.5%
A significant fiscal stimulus program would stimulate US economic growth, reduce unemployment and ultimately shrink the deficit. Instead, we are on the path of cutting
spending, which will keep unemployment high and revenues low, and, therefore, perpetuating large deficits.
Unfortunately, we are led by people who engage in static, two-dimensional thinking, while we live in a dynamic, three-dimensional world. The debt ceiling agreement increases the
probability of another recession. We may be repeating the political mistakes of 1937, which will prolong the Great Recession. This time, there is little prospect for a large
fiscal stimulus package, like World War II, to solve the problem.
