EconoMonitor

The Wilder View

Government deficit set to balloon: Why shouldn’t we worry?

The budget deficit is already estimated to reach $1 trillion (yes, $1,000,000,000,000) in 2009, and that doesn’t include the $300 billion, no $500 billion, no $1 trillion stimulus plan. When is it okay to worry?

If the only new federal outlays were in relation to the second ECONOMIC stimulus package, then I wouldn’t be as worried. However, the U.S. government has already funneled $1.06 trillion into stemming the credit crisis, leaving little wiggle room for Obama’s latest $1 trillion stimulus package. Time to worry.

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There is some debate over how quick and what type should be the stimulus package. Within one publication of the Economist, there are inconsistencies.

From the Economist on December 11, 2008:

For once, politicians and economists agree the deficit should not be a worry. The credit crunch and the collapse in the stockmarket mean households are trying to consume less and save more. But for them to do so collectively, some other sector must consume more and save less. Corporations are not going to do it: they are cutting investment and hoarding cash in the hope of staving off a liquidity crisis or even bankruptcy. Demand is not going to come from the rest of the world: many other countries are in recession. Even in China, which is still growing fast, demand for foreign goods is contracting sharply: by 18% year-on-year, according to figures released on December 10th. So that leaves the federal government.

Also from the Economist on December 11, 2008:
Quick and easy is not the same as goodThe danger comes when these two objectives conflict. Given that stimulus is likely to be regarded as the primary aim, a premium will tend to be placed on actions that yield the most rapid results. America’s governors are already falling over each other to submit their lists of “shovel-ready” projects to Washington, DC. But quick and easy is not necessarily good.The federal government is not good at discriminating between infrastructure schemes. Too much cash has gone into encouraging sprawl or keeping senators from small states happy with showy projects; too little into building things that are harder to get approved but encourage economic growth or control congestion, such as light railways or road-rail freight systems. Obviously each project should be measured on its merits. But a good broad test will be where the money goes. The 100 biggest metropolitan areas account for 65% of America’s population and 75% of its output. That is where the infrastructure is needed. But if “bridges to nowhere” start springing up in the boondocks, it will probably be money wasted.

Even though politicians and economists agree that a stimulus package is prudent, they certainly don’t agree on what fiscal package is required. Quick and easy or tax breaks versus spending. Mark Thoma points out the different stimulus effects between tax cuts and spending.The problem: in reference to whether or not government debt should be a consideration, the stimulus debates leave out the spending that has already occurred to stem the financial crisis. These outlays already total $1.06 trillion, afforded only by newly issued government debt.

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The table lists the current and maximum funding allocated by the fiscal sector to shore up the financial system. The government has already spent $1.06 trillion on the financial crisis, but allocated up to $3.67 trillion. And with the Citigroup allocation not even tapped and the TARP funding most likely to be spent with Congress’ blessing, the outlays could very well approach the $3.67 trillion.

To be sure, the fiscal outlays for the financial crisis are different from those associated with the stimulus plan, as many of the listed outlays are in the form of a loan, and (hopefully) will eventually be paid back. But they are still outloays. And the Obama stimulus plan gains traction with each week that passes: On October 15, Democratic leaders said $300 billion. On December 1, Pelosi says $500 billion. On December 13, Obama’s team implies that $600 billion is a LOWER BOUND; the price tag will be upwards of $1 trillion.

Who knows, next week it may be $1.5 trillion. It worries me that Congress is working in crisis mode and not thinking clearly. Obama expects to spend $600 billion in the first year – that’s a $1.6 trillion deficit in 2009 – without the rest of TARP funding, the Citigroup bailout and any other allocated funding – or roughly 11% of GDP.

Sure, economists and policymakers can tout that debt accrual should not be a worry, but I completely disagree. More is not necessarily better. Just one month ago, Paul Krugman called a $600 billion stimulus package “huge”! What has changed since then?

As soon as the government becomes comfortable with $700 billion, they up the ante another $200 billion. More gets you through the next year, but what about in 10 years?


Originally published at the News N Economics blog and reproduced here with the author’s permission.

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