The federal deficit
2009
2009-10-16-AP-record-1.4-trillion-deficit
Federal Deficit Hits All-Time High of $1.42 TrillionBy THE ASSOCIATED PRESS, 2009-10-16
Filed at 8:42 p.m. ET
WASHINGTON (AP) –
[1]
What is $1.42 trillion? It’s more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada’s, and more than $4,700 for every man, woman and child in the United States.
[2]
It’s the federal budget deficit for 2009, more than three times the most red ink ever amassed in a single year.
[3]
And, some economists warn, unless the government makes hard decisions to cut spending or raise taxes, it could be the seeds of another economic crisis.
[4]
Treasury figures released Friday showed that the government spent $46.6 billion more in September than it took in, a month that normally records a surplus. That boosted the shortfall for the full fiscal year ending Sept. 30 to $1.42 trillion. The previous year’s deficit was $459 billion.
[5]
As a percentage of U.S. economic output, it’s the biggest deficit since World War II.
[6]
“The rudderless U.S. fiscal policy is the biggest long-term risk to the U.S. economy,” says Kenneth Rogoff, a Harvard professor and former chief economist for the International Monetary Fund. “As we accumulate more and more debt, we leave ourselves very vulnerable.”
[7]
Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this fiscal year.
[8]
President Barack Obama has pledged to reduce the deficit once the Great Recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.
[9]
Friday’s report showed that the government paid $190 billion in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government’s total debt rises to $17.1 trillion by 2019.
[10]
Without significant budget cuts, that would crowd out government spending in such areas as transportation, law enforcement and education. Already, interest on the debt is the third-largest category of government spending, after the government’s popular entitlement programs, including Social Security and Medicare, and the military.
[11]
As the biggest borrower in the world, the government has been the prime beneficiary of today’s record low interest rates. The new budget report showed that interest payments fell by $62 billion this year even as the debt was soaring. Yields on three-month Treasury bills, sold every week by the Treasury to raise fresh cash to pay for maturing government debt, are now at 0.065 percent while six-month bills have fallen to 0.150 percent, the lowest ever in a half-century of selling these bills on a weekly basis.
[12]
The risk is that any significant increase in the rates at Treasury auctions could send the government’s interest expenses soaring. That could happen several ways -- higher inflation could push the Federal Reserve to increase the short-term interest rates it controls, or the dollar could slump in value, or a combination of both.
[13]
The Congressional Budget Office projects that the nation’s debt held by investors both at home and abroad will increase by $9.1 trillion over the next decade, pushing the total to $17.1 trillion decade under Obama’s spending plans.
[14]
The biggest factor behind this increase is the anticipated surge in government spending when the baby boomers retire and start receiving Social Security and Medicare benefits. Also contributing will be Obama’s plans to extend the Bush tax cuts for everyone except the wealthy.
[15]
The $1.42 trillion deficit for 2009 -- which was less than the $1.75 trillion that Obama had projected in February -- includes the cost of the government’s financial sector bailout and the economic stimulus program passed in February. Individual and corporate income taxes dwindled as a result of the recession. Coupled with the impact of the Bush tax cuts earlier in the decade, tax revenues fell 16.6 percent, the biggest decline since 1932.
[16]
Immense as it was, many economists say the 2009 deficit was necessary to fight the financial crisis. But analysts worry about the long-term trajectory.
[17]
The administration estimates that government debt will reach 76.5 percent of gross domestic product -- the value of all goods and services produced in the United States -- in 2019. It stood at 41 percent of GDP last year. The record was 113 percent of GDP in 1945.
[18]
Much of that debt is in foreign hands. China holds the most -- more than $800 billion. In all, investors -- domestic and foreign -- hold close to $8 trillion in what is called publicly held debt. There is another $4.4 trillion in government debt that is not held by investors but owed by the government to itself in the Social Security and other trust funds.
[19]
The CBO’s 10-year deficit projections already have raised alarms among big investors such as the Chinese. If those investors started dumping their holdings, or even buying fewer U.S. Treasurys, the dollar’s value could drop. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.
[20]
A lower dollar would cause prices of imported goods to rise. Inflation would surge. And higher interest rates would force consumers and companies to pay more to borrow to buy a house or a car or expand their business.
[21]
“We should be desperately worried about deficits of this size,” says Mark Zandi, chief economist at Moody’s Economy.com. “The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation.”
[22]
If all that happened rapidly, it could send stock prices crashing and the economy tipping into recession. It could revive the pain of the 1970s, when the country battled stagflation -- a toxic mix of inflation and economic stagnation.
[23]
Paul Volcker, then the chairman of the Federal Reserve, responded by raising interest rates to the highest levels since the Civil War in a determined effort to combat a decade-long bout of inflation. His campaign pushed banks’ prime lending rate above 20 percent in 1981 and sent the country into what would be the longest post-World War II downturn before the current slump. Unemployment jumped to a postwar high of 10.8 percent in December 1982.
[24]
The battle against inflation, though, was won.
[25]
Most economists say we have time before any crisis hits. In part, that’s because the recession erased worries about inflation for now. In its effort to stimulate the economy, the Fed cut a key interest rate to a record low last December and is expected to keep it there possibly through all of next year. Demand for loans by businesses and consumers is so weak that low rates are not seen as a recipe for inflation.
[26]
Some hold out hope that Congress and the administration will act before another crisis erupts.
[27]
Robert Reischauer, a former head of CBO, said that in an optimum scenario, Congress will tackle the deficits next year. A package of tax increases and spending cuts could be phased in starting in 2013 and gradually grow over the next decade.
[28]
The administration has pledged to include a deficit-reduction plan in its 2011 budget, which will go to Congress in February.
[29]
Stanley Collender, a budget expert at Qorvis Communications and a former staff aide to House and Senate budget committees, cautions that unless investors show nervousness about the debt, the budget debate next year could feature more posturing between the two parties than any real action to fix the problems.
2009-10-17-NYT-record-1.4-trillion-deficit
$1.4 Trillion Deficit Complicates Stimulus PlansBy JACKIE CALMES
New York Times, 2009-10-17
[The NYT’s rewrite of the above AP story.]
2009-10-17-WP-record-1.4-trillion-deficit
Record-High Deficit May Dash Big Plans$1.4 Trillion in Red Ink
Means Less to Spend On Obama's Ambitious Jobs, Stimulus Policies
By Lori Montgomery and Neil Irwin
Washington Post, 2009-10-17
[The WP’s rewrite of the above AP story.]
2009-12-14-Peterson-Pew-Budget-Commission-Red-Ink-Rising
Red Ink Risingby the Peterson-Pew Budget Reform Commission
budgetreform.org, 2009-12-14
In Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt
[36 pages, PDF],
The Peterson-Pew Commission on Budget Reform
calls on policy makers to stabilize the national debt through a six-step plan.
Crafted over the past year by former heads of
the CBO, OMB, GAO, and the congressional budget committees,
the plan reflects a bipartisan approach
to avoiding the tremendous global risks of America’s expanding debt,
without destabilizing the economic recovery.
Red Ink Rising is the first of two major reports to be released by the commission.
2009-12-18-WP-Broder-Peterson-Pew
Calling on Congress to stop the debt tsunamiBy David S. Broder
Washington Post Op-Ed, 2009-12-18
[1]
The 34 names are familiar to anyone
who has followed economic policy in Washington for the past generation,
one-third of them former chairmen or members of key committees of Congress,
seven of them former directors of
the White House Office of Management and Budget,
two of them former comptroller generals of the United States,
seven of them former directors of the Congressional Budget Office,
and one of them -- Paul Volcker --
a former chairman of the Federal Reserve System
and now an adviser to President Obama.
[2]
Both political parties are well represented in their number.
But they came together this week as signatories of a nonpartisan manifesto,
essentially a stark warning to the president and Congress
and a plea for action on behalf of the next generation.
[3]
The United States, they unanimously said, is facing “a debt-driven crisis --
something previously viewed as almost unfathomable
in the world’s largest economy.”
Under the impact of the worst economic calamity since the Great Depression,
the federal government ran a deficit of $1.4 trillion this past year.
The rescue effort was necessary
but in 2009 alone, the public debt grew 31 percent,
from $5.8 trillion to $7.6 trillion,
rising from 41 percent to 53 percent of gross domestic product (GDP).
[4]
Unless strong remedial steps are taken in the years just ahead,
the debt is projected to rise to
85 percent of GDP by 2018 and 100 percent four years later.
By that time, barely a dozen years from now,
these sober-sided, deeply experienced folks say,
the American economy is likely to be in ruins.
[5]
All of us have become accustomed to hearing lamentations --
or partisan accusations --
about the changes in the annual budget deficits,
the gap between federal revenue and spending in a particular year.
But this commission deliberately shifted its focus
from the deficit to the underlying debt.
[6]
The reason was explained to me by one of the Democrats, Alice Rivlin,
formerly a director of both the Congressional Budget Office
and the Office of Management and Budget.
“Previously, when we were worried about deficits,
we could take comfort in the fact that
the debt was not very high relative to the economy,” she said.
“But now that debt has shot up. The cushion has gone.
If the same thing [a severe recession] happened again,
we wouldn’t be able to borrow to deal with it.”
[7]
In addition to robbing us of the flexibility to deal with future crises,
the rapidly rising debt level
could push up interest rates, threatening economic recovery;
slow the growth of wages; depress living standards;
make the United States even more dependent on foreign lenders;
and leave us vulnerable to a shock wave
if those lenders lose confidence in our ability to repay the loans.
[8]
To avoid those consequences, these experts --
writing under the auspices of the Peter G. Peterson Foundation,
the Pew Charitable Trusts and the Committee for a Responsible Federal Budget --
suggest a series of steps.
[9]
First, they want Obama in his State of the Union address
to urge Congress to join in a pledge
to stabilize the debt at no higher than 60 percent of GDP by 2018.
(Remember, it is 53 percent now.)
This would require actions by Congress and the administration
to start reducing the projected annual deficits, which add to the debt,
starting in 2012.
[10]
That would make debt-management an economic priority
once the effects of the current severe recession have eased.
To ensure that the pledge is kept,
those who signed this report would ask Congress and the president
to set up an enforcement mechanism
that would automatically reduce spending or increase taxes
when the debt target is missed in any year from 2012 to 2018.
[11]
This is stiff medicine, but this report’s message is that
temporizing on this issue poses such perils to the nation’s future
that the risk is unacceptable.
[12]
When Congress this week ducked its responsibility again
by deciding to enact a temporary, two-month increase in the debt ceiling,
the need for a shock treatment like this report could not be plainer.
2010
2010-01-15-Buchanan-Is-a-US-Default-Inevitable
Is a U.S. Default Inevitable?by Patrick J. Buchanan
The American Conservative Blog, 2010-01-15
[Alternative source]
...
[T]here were those who warned
a housing bubble was being created like the dot-com bubble;
others who predicted the Empire of Debt was coming down.
As, today,
there are those warning that the United States,
with consecutive deficits running 10 percent of gross domestic product,
is risking an eventual default on its national debt.
The warnings come from
the Committee on the Fiscal Future of the United States, chaired by
Rudolph Penner, former head of the Congressional Budget Office, and
David Walker, former head of the Government Accountability Office
and author of
“Comeback America:
Turning the Country Around and Restoring Fiscal Responsibility.”
With that share of the U.S. national debt
held by individuals, corporations, pension funds and foreign governments
having risen in 2009 from 41 percent to 53 percent of GDP,
Penner and Walker believe it imperative to get the deficit under control.
Unfortunately, it is not possible to see how, politically, this can be done.
Consider.
The five largest elements in the budget are
Social Security, Medicare, Medicaid, defense and interest on the debt.
With interest rates near record lows, and certain to rise,
and back-to-back $1.4 trillion deficits,
this budget item [for interest on the debt] has to grow and has to be paid
if the U.S. government is to continue to borrow.
Second, with seniors on fire against Medicare cuts in health care reform,
it would be fatal for the Obama Democrats
to curtail Social Security or Medicare benefits any further this year.
Next year, they will not only lack the congressional strength
but any desire to do so, after their anticipated shellacking this fall.
The same holds true for Medicaid.
The Party of Government
is not going to cut health benefits for its most loyal supporters.
Indeed, federal costs may rise as state governments,
constitutionally required to balance their budgets,
cut social benefits and beg the feds to pick up the slack.
This leaves defense.
But the president is deepening the U.S. involvement in Afghanistan
to 100,000 troops,
and the military needs to replace weaponry and machines
depreciated in a decade of war.
Where, then, are the spending cuts to come from?
Can the administration cut Homeland Security, the FBI or CIA
after the near disaster in Detroit?
Will Obama cut the spending for education he promised to increase?
Will he cut funding for Food Stamps, unemployment insurance
or the Earned Income Tax Credit in a recession?
For the near term, the entitlements are untouchables.
Is this Democratic Congress,
which increased the budgets of all the departments by an average of 10 percent,
going to take a knife to federal agencies or federal salaries,
when federal bureaucrats and beneficiaries of federal programs
are the most reliable voting blocs in their coalition?
What about tax hikes?
Obama has promised to let the Bush tax cuts lapse for those earning $250,000
but has pledged not to raise taxes on the middle class.
Any broad-based tax would be politically suicidal
for him and his increasingly unpopular party.
But if taxes are off the table,
Afghan war costs are inexorably rising,
and cuts in Social Security, Medicare, Medicaid and entitlement programs
are politically impossible,
as pressure builds for a second stimulus,
how does one reduce a deficit of $1.4 trillion?
How does one stop the exploding national debt
from surging above 100 percent of GDP?
America is the oldest and greatest constitutional republic,
the model for all the others.
But if our elected politicians are incapable of imposing
the sacrifices needed
to pull the nation back from the brink of a devaluation or default,
is democratic capitalism truly,
as Francis Fukuyama told us just two decades ago,
the future of mankind?
What the looming fiscal crisis of this country portends
is nothing less than a test of whether this democratic republic is sustainable.
[Obviously, there is no solution that won't anger powerful groups.
My proposal:
1. Put dollar caps, per person, on how much medical care Uncle Sam will pay for.
Further, restrict to medical essentials what Uncle Sam will pay for,
not nice-to-have items like Viagra, Fosamax, etc.
2. Taper off government-paid medical care as people get older.
The government will do less and less to keep you alive as you age: 70, 80, 90, 100.
After 100, you're on your own.
3. Encourage people to take better care of themselves
by minimizing government-paid health care
for conditions that people cause themselves,
like obesity-related items like hypertension and diabetes.
Exhibit A:How much does his healthcare cost?
4. Institute a border-adjusted VAT (cf.),
add a 50% tax bracket for ultra-high incomes,
enact a financial transaction tax and/or currency transaction tax
(cf. the Tobin tax), coordinated with the EU, OECD, and G-whatever,
eliminate entirely the deduction for employer-paid health insurance.
I know all of those are unpopular, and in some cases (rationing healthcare) radical,
but the alternative will, in a decade or so,
be far worse.]
2010-03-29-Samuelson-Democrats-healthcare-spending
With health bill, Obama has sown the seeds of a budget crisisBy Robert J. Samuelson
Washington Post Op-Ed, 2010-03-29
[1]
When historians recount the momentous events of recent weeks,
they will note a curious coincidence.
On March 15, Moody’s Investors Service -- the bond rating agency --
published a paper warning that
the exploding U.S. government debt could cause
a downgrade of Treasury bonds.
Just six days later,
the House of Representatives passed President Obama’s health-care legislation
costing $900 billion or so over a decade
and worsening an already-bleak budget outlook.
[2]
Should the United States someday suffer a budget crisis
[Why does Samuelson use the subjunctive?
IMHO, that lenders will in the future
either refuse to roll over U.S. government debt
or impose very painful conditions before they will do so
is inevitable,
unless the government adopts serious budget-balancing policies.],
it will be hard not to conclude that
Obama and his allies sowed the seeds,
because they ignored conspicuous warnings.
A further irony will not escape historians.
For two years, Obama and members of Congress have angrily blamed
the shortsightedness and selfishness of bankers and rating agencies
for causing the recent financial crisis.
The president and his supporters, historians will note,
were equally shortsighted and self-centered --
though their quest was for political glory, not financial gain.
[3]
Let’s be clear.
A “budget crisis” is not some minor accounting exercise.
It’s a wrenching political, social and economic upheaval.
Large deficits and rising debt -- the accumulation of past deficits --
spook investors, leading to higher interest rates on government loans.
The higher rates expand the budget deficit and further unnerve investors.
To reverse this calamitous cycle,
the government has to cut spending deeply or raise taxes sharply.
Lower spending and higher taxes in turn
depress the economy and lead to higher unemployment.
Not pretty.
[4]
Greece is experiencing such a crisis.
Until recently, conventional wisdom held that
only developing countries -- managed ineptly --
were candidates for true budget crises.
No more.
Most wealthy societies with aging populations, including the United States,
face big gaps between their spending promises and their tax bases.
No one in Congress could be unaware of this.
[5]
Two weeks before the House vote,
the Congressional Budget Office released
its estimate of Obama’s budget, including its health-care program.
From 2011 to 2020, the cumulative deficit is almost $10 trillion.
Adding 2009 and 2010, the total rises to $12.7 trillion.
In 2020, the projected annual deficit is $1.25 trillion,
equal to 5.6 percent of the economy (gross domestic product).
That assumes economic recovery, with unemployment at 5 percent.
Spending is almost 30 percent higher than taxes.
Total debt held by the public rises from
40 percent of GDP in 2008 to
90 percent in 2020, close to its post-World War II peak.
[6]
To criticisms, Obama supporters make two arguments.
First, the CBO says
the plan reduces the deficit by $143 billion over a decade.
Second,
the legislation contains measures
(an expert panel to curb Medicare spending,
emphasis on “comparative effectiveness research”)
to control health spending.
These rejoinders are self-serving and unconvincing.
[7]
Suppose the CBO estimate is correct. So?
The $143 billion saving is about
1 percent of the projected $12.7 trillion deficit from 2009 to 2020.
If the administration has $1 trillion or so
of spending cuts and tax increases over a decade,
all these monies should first cover existing deficits --
not finance new spending.
taking an expensive round-the-world trip
because it claims to have found ways to pay for it.
It’s self-indulgent and reckless.
[8]
But the CBO estimate is misleading,
because it must embody the law’s many unrealistic assumptions and gimmicks.
Benefits are phased in “so that
the first 10 years of [higher] revenue would be used to pay for
only six years of spending” increases,
a former CBO director, Douglas Holtz-Eakin,
wrote in the New York Times on March 20.
Holtz-Eakin also noted
the $70 billion of premiums for a new program of long-term care
that reduce present deficits but will be paid out in benefits later.
Then there’s the “doc fix” --
higher Medicare reimbursements under separate legislation
that would cost about $200 billion over a decade.
[9]
Proposals to control health spending face restrictions
that virtually ensure failure.
Consider the “Independent Payment Advisory Board” aimed at Medicare.
“The Board is prohibited from submitting proposals that would
ration care, increase revenues
or change benefits, eligibility or Medicare beneficiary cost sharing,”
says a summary by the Henry J. Kaiser Family Foundation.
What’s left?
Similarly, findings from “comparative effectiveness research” --
intended to identify ineffective care --
“may not be construed as mandates, guidelines
or recommendations for payment, coverage or treatment.”
What’s the point then?
[10]
So Obama is flirting with a future budget crisis.
Moody’s emphasizes two warning signs:
rising debt and loss of confidence that government will deal with it.
Obama fulfills both.
The parallels with the recent financial crisis are striking.
Bankers and rating agencies engaged in wishful thinking
to rationalize self-interest.
Obama does the same.
No one can tell when or whether a crisis will come.
There is no magic tipping point.
But Obama is raising the chances.
2010-05-17-Samuelson
Wake up, AmericaBy Robert J. Samuelson
Washington Post Op-Ed, 2010-05-17
[1]
You might think that Europe’s economic turmoil
would inject a note of urgency into America’s budget debate.
After all, high government deficits and debt are the roots of Europe’s problems,
and these same problems afflict the United States.
But no. Most Americans, starting with the nation’s political leaders,
dismiss what’s happening in Europe
as a continental drama with little relevance to them.
[2]
What Americans resolutely avoid is
a realistic debate about the desirable role of government.
How big should it be? Should it favor the old or the young?
Will social spending crowd out defense spending?
Will larger government dampen economic growth through higher deficits or taxes?
No one engages this debate, because if rigorously conducted,
it would disappoint both liberals and conservatives.
[3]
Confronted with huge spending increases --
reflecting an aging population and soaring health costs --
liberals would have to concede that
benefits and spending ought to be reduced.
Seeing that total government spending would rise even after these cuts
(more people would receive benefits, even if benefit levels fell),
conservatives would have to concede the need for higher taxes.
On both left and right, true believers would howl.
…
[An excellent column.
I just don't have the time to text-edit the rest of it.]
2010-07-08-NYT-Democrats-on-debt
For Democrats, Debt Debate and Familiar Ring of DisunityBy MATT BAI
New York Times, 2010-07-08
...
A lot of Democrats maintain that
deficits remain a distant concern at a moment of crisis,
especially while interest rates are historically low.
2010-07-12-WP-debt-commission
Obama's debt commission warns of fiscal 'cancer'By Dan Balz
Washington Post, 2010-07-12
2011
2011-06-22-NYT-Leonhardt
The Deficit, Real vs. ImaginedBy DAVID LEONHARDT
New York Times, 2011-06-22
...
Eventually, the country will have to confront the deficit we have,
rather than the deficit we imagine.
The one we imagine is a deficit caused by
waste, fraud, abuse, foreign aid, oil industry subsidie
and vague out-of-control spending.
The one we have is caused by
the world’s highest health costs (by far),
the world’s largest military (by far),
a Social Security program built when most people died by 70 —
and to pay for it all, the lowest tax rates in decades.
2011-07-02-Kal-Debt-Doctor
Although the above cartoon shows European nations worried about how they will maintain their ability to receive future loans from investors,
there should be no doubt that the United States will be in exactly the same position
if congressional leaders cannot come to an agreement to stop the debt from rising at a high rate.
2011-09-02-WT-ten-year-deficit-factors
Dark-cloud financial forecast precedes president’s speechby Stephen Dinan
Washington Times, 2011-09-02
[The last paragraph.]
Under Mr. Obama's projections,
the government will spend $46.6 trillion over the next decade [2012-2021],
with the bulk of that -- $27.4 trillion --
coming on formula-driven entitlement programs such as Medicare and Social Security.
It will spend another
$9.1 trillion on security,
$5.9 trillion on interest payments on the debt, and just
$4 trillion on other basic domestic needs.
On the revenue side it will collect $37 trillion in taxes and fees --
leaving it with a $9.6 trillion deficit.
[So plug the gap.
Raise taxes to fill half, cut entitlements to fill the other half.
But do it now, before crises arise and to avoid over-burdening the future.]
2011-11-02-NYT-Pear-Four-past-deficit-panel-chairmen-advise-debt-supercommittee
Deficit Panel Is Warned That It Must Not Fail and Is Urged to CompromiseBy ROBERT PEAR
New York Times, 2011-11-02
Labels: economy, federal budget, financial
posted by KHarbaugh at 18:30
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