The cost of the US deficit
James Forsyth 1:32pm
Obama might be right that there is no alternative to the US running “trillion-dollar deficits”. But the $1.7 trillion deficit, its likely size in 2009, is truly alarming. Consider these comparisons that Kevin Hassett provides:
These numbers mean that, at some point soon, serious entitlement reform is going to have to be enacted. I suspect that social security and medicare reform could come to dominate Obama’s second term. America cannot afford to keep kicking these cans down the road.“The whole world’s military spending in 2006 totalled a little less than $1.2 trillion. So next year’s U.S. deficit could cover that and still have $500 billion left over for building bridges.Perhaps the most disturbing comparison is this one: When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.”
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David Bouvier
January 13th, 2009 2:43pm Report this commentIf I remember correctly, it IS covering about 50% of global military spending.
The serious point is that a lot of that cash is going on - hopefully - capital outlays with future value.
Blowing a trillion on assets is not quite the same as blowing a trillion on current expenditure.
Of course, the uncertainty regarding the quality of assets being acquired is a bit of a concern.
Daniel
January 13th, 2009 2:50pm Report this commentI suspect you are right about the inevitability of welfare reform. Much the same point could be made about the UK.
However, on the broader issue of the deficit, I would recommend that you look at what the IMF is saying about this today on its website (www.imf.org):
"In normal times, the Fund would indeed be recommending to many countries that they reduce their budget deficit and their public debt. But these are not normal times, and the balance of risks today is very different.
If no fiscal stimulus is implemented, then demand may continue to fall. And with it, we may see some of the vicious cycles we have seen in the past: deflation and liquidity traps, expectations becoming more and more pessimistic and, as a result, a deeper and deeper recession. If, instead, a fiscal stimulus is implemented but proves unnecessary, the risk is that the economy recovers too fast. Surely, this risk is easier to control than the risk of an ever deepening recession.
I would put it even more starkly. What is needed is not only a fiscal stimulus now but a commitment by governments that they will follow whatever policies it takes to avoid a repeat of a Great Depression scenario. If they do so, the fear that people and firms have today will fade, and demand will pick up."
Clearly, there is a legitimate debate to be had about whether the fiscal stimulus should take the form of government spending (with its long time lags) or tax cuts. But in opposing any increase in the deficit from current levels, Cameron and Osborne seem willing to shrug off the IMF's dire warnings. A touch arrogant, perhaps?
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