Friday, March 13, 2009
To put the deficit and debt into further perspective, it is necessary to show the relationship of debt to the underlying economy as represented by GDP (gross domestic product). Naturally, larger economies can support higher debt just because they are larger.
In the chart to the right, the annual deficit (and a few surpluses) are shown relative to the annual GDP each year. Again, WW2 deficit spending shows as a spike that shifts to periodic surpluses in the years after the war.
While the 2009 spike does drop down in the 2009-2019 budget, it remains at a high deficit level. Many economists claim that a strong economy can support deficits that range from 3 to 4% of GDP. However, if such deficits continue without ever having a surplus, the debt level will continue to climb with no end in sight.
This situation is reflected in the 2009-2019 budget as charted as debt as a percent of GDP. Even though the budget continues with 3-4% deficit levels, the debt continues to grow without a correction for the 2009 stimulus spending. This is unlike the deficits during WW2 that were brought back in line during the 25 years after the war.
This analysis then brings up the question: What percent of GDP are we as a nation comfortable with for our debt level? Are we comfortable with carrying debt at 90-100% of GDP? To what extent does this level of debt reduce our ability to do emergency borrowing in the event of war or another extended recession in the future? Will there be sufficient economic slack for the nation to respond?
Tuesday, March 10, 2009
A few days ago I posted some charts on the growing national debt over the last 20 years and what is projected in President Obama's budget. The chart to the right reflects the national debt per person, all 300 million of us and our personal piece of the debt. Every child being born inherits his/her own piece of the debt, about $34,000 each.
What becomes worrisome when viewing this chart is the fact that the trend is moving beyond the exponential point of inflection and is becoming linear UP. Might this be what the stock market is worried about?
To keep things in perspective though, the data above has been restated in today's dollars. However, this only reveals WW2 and some of the surpluses during the Clinton Whitehouse. The trend in the proposed budget is not quite as steep when expressed in constant dollars, but it is still showing an expectation of rapid growth of the debt relative to the minor growth of the population. It took the past 20 years for the debt per person to double, but Obama is projecting the doubling to occur in a little over the next ten years.
- What say do our children and grandchildren have in the burden we are leaving them?
- How much debt is "too much?" How will we know before it is too late?
Friday, March 6, 2009
The chart to the right shows the Federal debt going back to 1929. The estimates for 2009-2019 come from the proposed budget released 2/26 by President Obama. Prior to 1980, debt wasn't much of an issue and the Clinton administration did a reasonable job containing the debt, though some credit is due to Congress during this period. However, the Bush Presidency, even with a Republican controlled Congress and Senate, continued the increased use of debt to support government spending. Eight years of "good times." However, even more worrisome is the expected jump this year to cover the stimulus packages and expected deficits for the next decade in support of the Obama agenda.
As with the Deficit charts, the Debt needs to be put in some perspective with an adjustment for inflation.
The chart to the right adjusts the past to current (2009) dollar value. As with the deficit chart posted a couple days ago, you can now see the impact of WW2. But the FDR spending during the Depression really doesn't register to any extent. Even after the war, there were sufficient surpluses to bring the debt down to where it remained steady into the early 80's. Since then the increase has been dramatic, living the good life with borrowed money that will have to be shouldered by our children and grandchildren. Much of the rationale used in the increased spending during this period is to "do it for the children." Technically, this isn't quite right. What we have done is "do it TO the children."
One argument to support the use of debt is that we are lending money to ourselves. However, increasingly the money being borrowed comes from OPEC (failed energy policy) and China (extreme trade imbalance). Both of these sources create a national security risk through dependency on others to support our debt.
- What is the level of debt that is appropriate for our Country? This is a policy issue that is lost in the political debate.
- Where is the borrowing going to come from to support the spending now being proposed?
- What would happen if foreign countries fail to continue purchasing our debt? Even worse, what if they start to sell the debt they already hold? Most likely they will continue to hold the debt they have because they have few alternatives. They also don't want to incur even more damage on the global economy on which they are dependent. But do they have sufficient cash to keep buying US debt since their economies are also being impacted by the recession?
This brings the discussion to the next issue - US Government borrowing competes with others also seeking to borrow, other countries and businesses around the world.
- To what extent will the increase in US borrowing push interest rates higher? This impact is not reflected in the Whitehouse budget, but it could easily become a concern as borrowing exceeds funds available for investment.
- To what extent will businesses be locked out of the investment market as they have to compete with the US Government for funds to expand their businesses? To what extent will curtailed economic expansion eventually start to impact the revenue side as GDP growth stagnates?
These are not easy questions. They are also questions that I do not hear being asked in Washington as politicians rush to spend money as quick as they can believing that spending is the answer. However, if deficit spending were sufficient to spur a robust economy, we should be riding high right now given the spending over the last 20 years, goosed by the most recent eight years of deficits.
Wednesday, March 4, 2009
The chart to the right captures the history of Federal spending going back to 1929. All amounts are shown in current dollars (not inflation adjusted). The vertical line is 2008, dividing the known past from that being proposed in the FY 2010 budget posted by the Whitehouse 2/26. The peak right after the vertical line is the stimulus package now working its way into the economy. While the President is cutting the deficit spending in future years relative to this year, you can clearly see the deficits are projected to be much higher than what they have been in past years. Much higher than at any time in history. For some reason, I thought I heard this cut in deficit spending in 2010-2019 was to be more dramatic than what was published at http://www.whitehouse.gov/omb/budget Upon reflection, I guess I was thinking the deficit cut was in comparison to spending during the Bush Presidency and missed the fact that the comparison was to 2009. Cutting the deficits in 2010-2019 to half that projected this year is still one hell of a deficit to be faced each year.
(Regardless of what I think about these continued high deficits for the next decade, you do have to give some credit to the President for opening up the proposed budget for everyone to read. Without easy access to the budget data, I would still be in the dark about the projected economic future of the country.)
Still, to put the deficit spending into some perspective, the past has to be adjusted for inflation. This adjusted chart is shown to the right and shows some really interesting information. World War II shows up clearly as a peak in deficit spending, followed by many years of a mix of small surpluses and deficits. Looking for the FDR spending during the depression - where is it? Everyone seems to be relating the stimulus packages to spending done during the Depression. However, the actual amount spent during that time does not even move the needle even after adjusting for inflation. The level of spending we are now doing has never been attempted in the history of our country, never. Even more worrisome than the spending spike this year is the continued high deficits through 2019. This proposed budget seems to reflect a major change in spending policy that goes beyond the current economic conditions.
Am I missing something? I sure hope so, but I have been through the budget tables a number of times and everywhere I look, I see runaway spending not offset by increased revenues. (Note that there are a number of new sources of revenue projects, but more on those later, especially the indirect taxes that will eventually filter down to consumers.) To the extent the Federal government will have to cover the deficits with increased borrowing, that money will be moving out of the capital markets servicing business expansion. More to think about on that topic.
In thinking about this situation, I believe everyone wants the best for the Country. I would also like to drive a new car, take a vacation to a nice warm beach, and work four days a week giving me three day weekends, but it's not going to happen. I can't afford what I would like and have to settle for what I can afford. This I believe is the question the Country is going to have to face shortly, what can it afford, regardless of what we would like?
The second meaning behind Leader42 goes beyond the 42th level of leadership rank to involve the Ultimate Question - what is the meaning of life, the universe, and everything? 42. If you don't understand the answer, you need to understand the question better. Searching for answers is common. Less common is the search for the right questions to ask.