US Budget Deficit
Date: Tue Jan 29 10:47:32 2013
From: Jesus Ortega
To: Sam Moreno
Subject: US Budget deficit

On Mon, Jan 28, 2013 at 11:10:48PM +0000, Sam Moreno wrote:

Hi there.  

As it could be expected, this very same debate is also taking place in
other countries.  Of course, that very fact already tells you that it
cannot be Obama's fault.  So, let's start by removing all the partisan
rhetoric out of the picture.  The fact remains that governments from
different partisan persuasions from a good array of developed nations
currently show a relatively large deficit (i.e., larger than it is usual
for them).  As the author says, it's understandable in these economic
circumstances.  Yes, it's what economists call "automatic stabilizers".
Government spending in the form of unemployment benefits and others go up
as a consequence of the crisis, while revenues go down for the same
reason.  For example, just this morning I was reading in the Spanish
newspapers that our Government finally managed to bring up revenues to the
expected (i.e., needed) level to be able to guarantee some financial 
stability, and they did so thanks to a tax increase in the second half of 
2012 (revenues had dropped severely as a consequence of the crisis since 
mid-2010 or so).  It makes sense.  How could it be otherwise?  

So, let's agree to forget about the sudden increase of the deficit that, 
as the author correctly points out, already started in the last year of
George W. Bush's term.  It's not due to Obama's "socialist policies".  
As a matter of fact, I'm not aware of any legislative change that took
place during Obama's first four years that could have brought about that
increase, other than the problematic economic circumstances that (again)
all developed nations are currently going through (yes, health reform was
passed but, as you very well know, that didn't have any impact whatsoever
in Government spending yet and, if it ever does, it will only happen after
certain dispositions take effect in 2014, if I remember right).  

In (partial) conclusion: yes, the large deficit is temporary, as is
temporary in other countries too.  I think we both agree on that.

Moving on, then.  I don't think the relevant question is whether the
deficit is too large *now*, but rather whether the US deficit is an 
exception caused by the current economic situation or, on the contrary,
it's something structural.  Fortunately, this information is readily
accessible online these days.  I found a couple of charts [1,2] at random 
that clearly show the US budget deficit trends in the past few decades.  
Since I picked them at random, let me know if you don't think they are an
accurate portrait of the deficit.  I'd say a quick overview clearly
indicates that, with the exception of the last 3 years of Clinton's
term and the first one of George W. Bush's, a budget deficit has been a
constant in US Government finances since the 1970s.  Thus, I think
there are good reasons to suspect (it's just that, a strong suspicion,
since we'd have to do a more thorough analysis to reach a conclusion and
be anle to state it without a doubt) that the US Government deficit is
indeed a structural issue, at least since the 1970s.    


Now, if you want to, we can search for charts and data that go beyond that
date.  It may be interesting to see if prior to the 1970s we also see the 
same behavior.  Also, if you want to, we can research what the situation
is in other developed economis (Germany, Japan and the UK, for example).  
But, regardless, that would only give us a context.  It may be an
interesting exercise, but it wouldn't change the fact that the Government
deficit has been a constant in the US economy for several decades now.
Can we agree to that too?

So, onto the next step.  Once we have clarified that: 1) The size of the
deficit right now seems to be due to the particular economic circumstances
of the past few years, and 2) The US budget deficit seems to have
structural causes, we should discuss whether or not a budget deficit is a
bad thing, right?  

Well, once again, it truly depends on the economic context.  As the author
says, when there is an economic slowdown, it is not bad at all for the
Government to employ resources (both in the form of hiring more employees
in the public sector, which truly rarely is the case here in the US and
it doesn't appear to be happening now, and purchasing goods and services) 
that would otherwise be unused.  This is what economists call a
"counter-cyclical policy" (at least that's how it's called in Spanish, not
sure if it's the same in English, to tell you the truth, but you get the 
idea).  So, right now, it's not bad to incur in a deficit (see more below,
though, since there are some caveats) in order to boost economic growth 
(let's limit our conversation to mainstream economics, so we will not
enter to discuss whether that economic growth can be infinite and
unlimited, its effects on the environment, issues of redistribution, etc.).

However, once again, returning to the other issue we have just discussed
previously, the problem is that the US budget deficit appears to be 
structural (i.e., not limited just to this particular context).  In other
words, a simple look at a chart showing the budget trends in the last few
decades (see links above) clearly shows an overwhelming presence of budget
deficits *both* during economic slowdowns *and* other phases characterized
by clear economic growth (again, with the exceptions mentioned above, and 
that's another issue that could be studied).  

So, is a deficit good or bad?  As indicated above, if it's a temporary
deficit that is used to counter the effects of a down cycle, it may even
have positive effects (mind you, depending on the nature of the public 
spending itself, since it could be spent intelligently or not, that is, 
in a way that promotes better productivity and competitiveness of the
economy or not).  However, from what I mentioned above, it clearly looks
as if what we have in our hands is not a temporary deficit, but rather a
structural one.  Is that good?  

Well, as the author also explains, it all depends on the interest on the
debt and where that money goes.  In general, I'd say that the more US
debt that is purchased by foreign investors, the more money that is
siphoned out of the US economy and, therefore, the more negative its
impact.  It doesn't seem to be so easy to find actual data to see whether
the amount of debt in foreign hands has increased in the past few decades,
but my guess is that it did grow.  Also, the Federal Reserve could
purchase debt by printing more money, which has inflationary consequences 
and, truly, is just a short-term trick.  On the other hand, debt in the
hands of American citizens and companies won't make much of a difference, 
I guess (I'd have to give the whole thing more serious consideration).  

The fact remains that, regardless of all that, a simple look at the
historic behavior of the US debt also shows a clear trend towards a 
constant growth in the past few decades.  Once again, I suspect that
indicates the existence of a structural imbalance.  

Actually, why don't we do some serious research on the topic?  I propose
that we could use Google Docs to collaborate on a document where we can
seriously research all this and learn along the way.  I wouldn't mind to
take the "action item" to put together the first draft of a document.
What do you say?  

Jesus Ortega