see also:
Budget Deficit
The biggest previous change was in 2000-2001 recession, when W’s tax cuts combined with a big cyclical fall in tax revenue to produce a large swing in the United State fiscal position. A modest surplus quickly turned into a large deficit.
Question: can fiscal stimulus (funded by deficits) lead to future growth?
paragraphs from Hoisington Asset Management's latest letter (last week's Outside the Box): "The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370).
"This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output."
Since government deficit spending has no long-term multiplier effect, growth (in Japan) has been nonexistent. (By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President's Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts.)
Large government deficits choke off the very investment that we need to create jobs. In the name of doing good, the unintended consequence is to make it more difficult for small businesses to start up and create jobs. And we all know that small business is the engine for job creation. The way out of the current morass is to create jobs and increase productivity. But if the government runs deficits of $1.5 trillion, that means whatever savings (corporate and consumer) we have will not go into the investments we need, but into government debt. Source: John Mauldin Newsletter, October 16, 2009
Deficits in In the USA,
see USA macro data
2008:
State and local government spending has been rising three times as fast as revenue amid warnings from governors that their finances are nearing crisis stage. State and local governments boosted spending 7.8% in the second quarter compared with 2007 while revenue rose 2.5%. The robust public spending reported Thursday by the Bureau of Economic Analysis means that government can provide more services, such as smaller class sizes, bridge repairs and expanded health care, but it also could bring higher taxes. The added spending is financed mostly by debt and budget reserves. State and local governments are on track to spend more than $2 trillion for the first time in 2008 — about 13% of the nation's gross domestic product. A key factor driving higher spending: New employees and higher compensation. source: USA Today To fix the budget deficit: `First, raise the retirement age. Second, phase out income tax relief on new mortgage loans. Third, introduce a carbon tax. Fourth, introduce a national value added tax, tied to healthcare reform.´ Clive Crook, FT columnist
Paying for the Deficits:
The key question = how will the US pay for its large deficits? Can we borrow enough from abroad? Will foreign central banks finance the bill? If we fix global imbalances, will foreign governments STILL foot the bill? This is a key question for the global financial system...
To help answer this question, we turn to John Mauldin Newsletter, October 16, 2009
"How can we find $1.5 trillion each and every year? Some of it will come from foreign central banks, as we continue to run a trade deficit. Once those dollars leave our shores, they do not disappear. They can only go back into a dollar-denominated investment. Up to now, that has typically been US government debt. If China decides to use its dollars to buy commodities or other assets, whoever sells them the assets now has the dollars and must decide what to do with them. So give or take a few billion, about $400 billion will come back to the US from our trade deficit next year. That still leaves $1.1 trillion.
Upon reflection, and cutting to the chase, I think that the buyers of the debt could be US banks for quite some time. So where do banks put their cash and reserves they are not lending (see Macro Data for charts showing cut-back of lending)? At the Fed and in Treasury debt. If you can leverage capital at ten to one (as banks can) and if you get 2% (for longer-term debt) and if you only have costs of, say, 50 basis points (or 0.5%), you can make a return on equity of 15% with no risk. And that is what we are seeing. Banks are taking the money the Fed is printing and the government is giving them and putting it back at the Fed. Bank reserves at the Fed are exploding. And they are likely to continue to do so, since bank balance sheets are still deteriorating, especially at smaller and regional banks exposed to commercial real estate loans (see discussion on Real estate
Wikipedia Definition:
A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite of a budget deficit is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock
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