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That Terrible Trillion
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What Krugman makes of the $1.089 trillion dollar U.S. deficit for fiscal year ending in Sept. 2012. He points out that the U.S. can have a stable to declining debt to GDP ratio with $400 billion debt. He cites the Clinton years (1992-2000) when the debt to GDP ratio declined from 49% to 33% with steady growth. What about the remaining $600 billion. He attributes this mostly to temporary factors which are reversible as growth picks up. Of this remaining excess deficit he says $400 billion is from lower tax payments to Treasury because of the 2008 economic crisis and the recession that followed. This includes the payroll tax cut which is also temporary to keep up consumer spending in the recession. The $150 billion is from unemployment insurance, food stamps, and other aid which is also reversed once growth picks up. He places emphasis on restoring economic growth as early as possible and reducing unemployment and using the recession for business to continue to invest in R&D, productivity, and government to preserve the social fabric, invest in education, and provide incentives for growth. S&P Nov. 8 report says the net government debt to GDP ratio is estimated to be over 80% in 2013. It will have to stabilize at current levels for S&P to preserve the U.S. credit rating, says S&P executive Chambers. The higher debt to GDP ratio in 2013 and lower growth rates expected makes the situation different from the lower debt to GDP ratios during the Clinton period. Britain, France and other major industrialized nations with political parties at either end of the political specrum have also chosen to stabilize or reduce debt to GDP ratios rather than take on the risks of them going much higher. The U.S. has the added problem of health care costs out of control with an aging population and about 17.9% of GDP going to healthcare costs in 2010 expected to increase significantly, as Medicare actuaries estimate enrollee numbers jump to 80 million in 2030 from 50 million in 2012. Democrats and Republicans have largely sidestepped this underlying problem in fiscal cliff negotiations.
What Krugman makes of the one trillion dollar U.S. deficit in 2012 and the alternate view of John Taylor on the U.S. deficit
08/22/2010
Krugman says $1.089 trillion to be exact for the fiscal year ending in Sept. 2012. He gives the 400-450-150 formula to understand what this means in simple terms. The debt would still be stable or declining as a ratio of GDP at $400 billion because of steady GDP growth. He cites the example of the period when debt to GDP declined from 49% to 33% because of steady growth during the Clinton years (1992-2000) even though Clinton started out in 2000 with a deficit. The $450 billion is from lower tax payments because of the 2008 economic crisis followed by recession which would be reversed with restored GDP growth. The $150 billion is from payments such as unemployment insurance, food stamps, to cushion the effects of that crisis and the recession, which would be reversed with restored economic growth.
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CBO projections in Jan 2014 show the U.S. debt stabilizing at 74% of GDP in 2014 and deficits below 3% for 2014-2017
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Higher economic growth of about 3% for 2014-2017 and the phasing out of spending to counter the effects of the severe recession of 2008-2010, have helped the U.S. stabilize debt levels and reduce deficits. After 2018 the long range projections show debt to GDP climbing to reach 79% in 2024.
Linked Articles
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