2008 September 09 Tuesday
US Budget Deficit Soars
Feel like living beyond your means? America is the place to be.
The budget deficit will jump by $246 billion to $407 billion this year, the Congressional Budget Office estimates in a report released Tuesday.
"Over the long run, growing budget deficits and the resulting increases in federal debt would lead to slower economic growth," the agency said.
The $438 billion projected for 2009 is still small potatoes in GDP percentage terms.
The fiscal 2009 deficit is projected to rise to 3% of GDP. Still, the budget deficit as a percentage of GDP has been higher before, in the 1970s and 1980s, reaching 6% in 1983.
Back in the early 1980s Federal Reserve chief Paul Volcker was pushing the US into repeated recessions in order to wring out inflation. Also, Reagan's tax cuts and defense build-up were expensive and of course entitlements were growing rapidly. So the US budget deficit was much larger then. Well, the Democrats want to show that they can outdo Reagan. Expect a much bigger budget deficit if the Democrats get their way with fiscal stimuli and good old pork barreling.
The still-emerging Democratic plan would pile more than $50 billion worth of new spending on roads, heating subsidies, aid to state governments and a further extension of unemployment benefits onto a deficit for next year that is already likely to near $500 billion. Loan guarantees for the troubled auto industry are also on the table.
"I would be surprised to see a package that would be less than, you know, $50 billion to $75 billion," said Sen. Charles Schumer, D-N.Y.
Come on Chuck, think big. $100 billion. $200 billion. Heck, why not $300 billion?
I am more worried about the trade deficit. Dr. Peter Morici, former Chief Economist at the U.S. International Trade Commission, points out we are going in hock to the world faster than the US government is going in hock. (same article here)
Today, the Commerce Department reported the June deficit on trade in goods and services was $56.7 billion, down from the $59.2 billion deficit in May. U.S. imports of consumer goods did ease, as a result of the recession in retail sales, but the cost of oil imports and the trade deficit with China continued to rise.
U.S. exports have been growing, but the trade deficit remains large because of high prices for imported crude oil and refined products, subsidized imports from China, and the continuing woes of the Detroit automakers. At about 4.8 percent of GDP, those pose a significant drag on the economy and combine to destroy thousands of high-paying U.S. jobs.
Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6.5 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.
With assorted central banks trying to pump up the dollar and China boosting dollar reserve requirements of commercial banks in order to boost the dollar I do not see the international "market" allowing trade to be conducted on terms that I would recognize as free. But anyone who wants to correct this situation with tariffs is labeled anti-free trade by legions of economists. Makes sense to them but not to me.
Randall said: But anyone who wants to correct this situation with tariffs is labeled anti-free trade by legions of economists. Makes sense to them but not to me.
You put on a tariff and they put on a tariff in return. The end result is that everyone pays more.
"You put on a tariff and they put on a tariff in return. The end result is that everyone pays more."
But isn't that the point, Steve? That for twenty years we have NOT been paying for what we have been spending? And further, I am happy to pay more if it helps my people, my tribe. I fail to see how spending an extra 25 cents at each meal for a Chinese trinket with my hamburger helps anyone in America -- except foreign trinket merchants. Many Americans are stupid, dumb as a box of rocks. I would much rather have them working making overpriced trinkets than me buying cheap Chinese trinkets and paying the police the money I saved to keep po' folks from breaking into my house and stealing my money and Chinese trinkets AND paying by having my currency inflated so high that it is worth sh!t. What does "more expensive" mean when they are loaning me the money to buy their crap anyway?
National debt as a percentage of GDP fell steadily from the end of WW II (over 90%) until the end of the Carter presidency, when it bottomed around 33%. It rose dramatically during the 12 Reagan-Bush I years, nearly doubling by the time Clinton became president. It declined somewhat during his two terms and has started to increase during Bush II's second term, but it is still well below where it w3as 50 years ago.
Here are some comparative numbers - national debt as a percentage of GDP:
Japan - 195
Norway - 75
Canada - 68
France - 64
Germany - 63
USA - 61
Switzerland - 45
UK - 43
Sweden - 41
Mexico - 23
China - 18
Russia - 6
@Randall-- If the taxpayers of another county want to subsidize the America consumer, let them. The "we have free trade but they don't so we need to errect barriers" argument is one of the silliest arguments I have ever heard. It is kind of like Americans accepting the idea: "You better not commit suicide or we'll kill ourselves first" (truly bizarre). Further, the underlying implication of the people who make the arguement "we have free trade but they don't so we need to errect barriers" is also spurious-- a belief that we can't let these 'unfair' countries take US market share from US businesses because once the foreigners have pushed US producers out of the market they will raise prices and take advantage of Americans consumers. This view is just plane silly since 1. there is no evidence of it, 2. American businesses willprobably just return when foreigners do raise prices, and 3. Other 'unfair' countries are simultaneously using their own taxpayer's money to subsidize their country gaining US market share. I guess it is always theoretically possible that the Chinese, Japanese, Koreans, Brazilians, Indians, Taiwanese, other South Americans and Europeans will all come together to set up a kind of cartel (it would be a landmark moment in the history of international cooperation since these countries have never agreed with each other on trade issues before)... but even if they did do this (again a BIG IF), all these nations would ALSO specifically need to exclude ONLY American firms.
@Big Bill, if you are happy to pay 25 cents more then do it. Your American colleagues have voted with their wallet and abandoned you on this issue, even if they say otherwise in surveys.
@Ned, the real issue is TOTAL debt http://3.bp.blogspot.com/_99FDm2zYhvI/SMGnCi1FNxI/AAAAAAAAAkw/vJSEOfoKR3k/s1600-h/debt_gdp.JPG NOT national debt (which is really only the US Federal government). The focus on natinal debt (and not its much bigger cousin TOTAL debt), and in particular the focus on its rate of growth, is also a little bizarre. It is one of those focusing on a small part of the left pocket when there is a much bigger right pocket distinctions that people should be very careful when making. We may have had faster rates of growth of the US national debt (again, really just US fedral debt), but we have never had so much TOTAL US debt before http://photos18.flickr.com/24012562_68e2121a3d.jpg and at this point ANY further growth of that debt is a big problem (whether its rate of growth is fast or slow) since systems do have 'tipping points' from which one day everything that looked good suddenly starts falling off a cliff.
Focusing on slower rates of growth on a small part of a much bigger problem still say nothing about the big problem itself- and Houston, we have a problem. The US has WAY too much debt.
I never made the "we have free trade but they don't so we need to errect barriers" argument.
I made the "if currencies are manipulated then the trade is coerced" argument. Currency fixing is like price fixing. If we have price fixing we do not have free trade.
As for American companies returning later:
1) Not if they no longer exist.
2) Not if they fear that if they try to return the foreign government will once again manipulate currencies or otherwise manipulate the market.
As for the "The US has WAY too much debt." comment: One has to think the market has major distortions or imperfections in order to believe that. My impression is that you do not believe that the market is that flawed.
Randal, I think the market is WAY flawed! I certainly do not believe the market can predict the future in any meaningful way. But just becasue I think the market is flawed does not mean I think anything else is less flawed.
My problem with even the word 'flaw'is that it is entirely dependent an original 'non-flawed' benchmark point of view.
If you want a quick 'label' of me to help you put me in some kind of quick perspective for discussion purposes (I never really thought about it like this before), I guess my 'comfort zone' probably lies within the Platonic world view. And my world view of life-society-economics-politics is heavily biased by complexity science and evolutionary biology.