Wild optimism about economic growth is at the heart of the Obama administration's plans to shrink the federal budget deficit. And that's not the only problem.
Worried that the global financial crisis combined with the Great Recession in the United States has bankrupted not just ourselves but our kids and their kids?
Good. You should be. Maybe then we'll do something about the problem before it's too late.
First, here's the good news for those of us who live in the United States. (If you live in some other den of fiscal iniquity, just remember that the names of the characters may be different, but the story is pretty much the same.)
The federal budget deficit for fiscal 2010, including a proposed $100 billion in new spending to create jobs, is expected to hit $1.6 trillion. This would beat the record (set in the distant past of fiscal 2009) by $150 billion and be equivalent to 11% of U.S. gross domestic product. For reference, the budget deficit that has pushed Greece into crisis is equal to 12.7% of Greek GDP.
How can this possibly be good news? Because the new budget proposed by the Obama administration for fiscal 2011 (which starts in October 2010) says the annual deficit will shrink to 4% of GDP by fiscal 2014.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=72d2b831-1190-43f6-bd01-2fb7a5e98cd9,29b66dc5-1ec6-4b36-8414-bb0f818ee14c,d751464d-d985-4f14-b016-d81f39ad8af7,08d3fb9f-ba63-4e7f-a516-d04e163a6527,cf7627e9-aa2f-4d3e-8c0a-34d92b58bc8c,cb5cf68b-37f4-4ffe-8d92-fcc43303c72d", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=72d2b831-1190-43f6-bd01-2fb7a5e98cd9,29b66dc5-1ec6-4b36-8414-bb0f818ee14c,d751464d-d985-4f14-b016-d81f39ad8af7,08d3fb9f-ba63-4e7f-a516-d04e163a6527,cf7627e9-aa2f-4d3e-8c0a-34d92b58bc8c,cb5cf68b-37f4-4ffe-8d92-fcc43303c72d;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');And now for the bad news: It ain't gonna happen. At least not if we follow the spending and taxing policies laid out in the administration's budget.
That budget assumes 2.7% GDP growth in fiscal 2010. That's reasonable. It's certainly close to the consensus among economists for this year.
But looking out toward fiscal 2014, the budget quickly arrives in fantasyland. The budget projections assume GDP growth of 3.2% to 4.3% for six consecutive years.
And this comes at a time when most economists -- even the optimists at the Federal Reserve -- are worried that this recovery will be weaker than most recoveries after recessions and that the long-term speed limit for growth in the U.S. economy is headed lower. From 1975 to 1995, full trend economic growth in the United States was about 3%. The Fed now estimates the speed limit to growth at 2.5%. Other economists, including those at the Congressional Budget Office, think it's even lower -- 2.3% annually or so.
In other words, the U.S. can't grow itself out of this hole nearly as easily as the Obama administration wishes.And the bad news Slower growth after the recession is one thing arguing against an easy solution, but it's by no means the only thing.
The interest rate the U.S. pays on its debt is rising -- just when the amount of debt has soared.
Cutting the budget looks impossible because our government, especially our wonderful Senate, is gridlocked. I find it hard to imagine how the Senate will pass any kind of budget this year.
Check out the national debt clock
Even in the best of political worlds, cutting the budget is hard. Only 40% or so of the federal budget is what's called discretionary, and that 40% includes the military budget. The rest consists of entitlements such as Social Security, Medicare and Medicaid. These entitlements are the hardest parts of the budget to cut -- and the fastest-growing.And we don't have a huge window in which to act.
In a Jan. 8 blog post, I wrote about research that argues that when a country's accumulated gross debt rises above 90% of GDP, it starts to reduce a country's economic growth rate by a median of 1 percentage point and an average of 4 percentage points. Under the current trend, the United States will show a debt-to-GDP ratio above 100% by 2012.
A slower economic growth rate caused by high debt levels makes it even harder to grow your way out of the hole.
And then, of course, there's the long-term demographic trend. The United States is an aging country. But we're not aging as quickly as most of the developed word or even as fast as some parts of the developing world, such as China. (For more on how the world is aging, see this blog post.) But aging relatively slowly doesn't help in this situation. A country that is aging in absolute terms is getting older and can look forward to a slower rate of economic growth.
If all this makes the situation sound depressingly grave, I'm afraid I've got even worse news: The world's traditional fix for this kind of debt problem when it's the result of a few years of financial mismanagement doesn't work very well when we're looking at a deeper and chronic problem shared by many of the world's countries.
Continued: Will the traditional solution work? More from MSN Money and MoneyShow.com
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We can have the strongest military in the world, but if we owe countless trillions to other countries, how secure and influential are we?
Its sounds to me that there will be tough choices ahead. And given the choice, I would much prefer a "weaker military" and foreign presence to making cuts in social security, medcare, education and such.
ReplyReport Abusepacksack 10 #5Monday, February 08, 2010 8:01:57 PMWe will not solve anything until governments stop spending our kids, and grandchild future away. We must down size our government agencies. Ask them what they do at work. And see if they could get away with that in the private sector. But if you increase taxes to solve your spending problems in government you be like many states that have seen companies move taking away their tax base. I know for a fact in Minnesota has that problem.ReplyReport Abusejooser73 #6Monday, February 08, 2010 8:02:04 PMi am all for that, but tell this to the US folks, yes the one that goes to the polls on election day, they will go and cast their votes like nothing is happening, see what happened in Massachusetts instead of writing in a candidate, we go for the ones that cause the problem great solution America.
Before you cut SS cut defense spending , we do not need to pay for the defense of Japan, South Korea, Europe, etc etc etc they can pay for their own defense, besides, it is a 1 trillion dollars entitlement for the Republicans, me i do not need the government to defend me, i can do that myself, that's why the right to bear arms., but i also do not need to pay for somebody else defense.
ReplyReport AbuseWowwhatgarbage #7Monday, February 08, 2010 8:03:57 PMEvery Federal Employee should start with a 10% paycut. That is less than everyone in the private sector. The only people not feeling the recession in this Country are Federal employees.ReplyReport AbuseMayflyguy #8Monday, February 08, 2010 8:09:23 PM
Thanks Jim. Good stuff, scary, but good. I am not much of a global econ dude, but it seems to me that sooner or later buyers of U.S. gov't bonds and bills are going to be few and far between. I used to tell my dad that when he bought T-bills he was just encouraging deficit spending. It peeved him off, but he was in denial about it. Wouldn't it be cool if we could organize a boycott of gov't paper? I also am sure that we could do a lot by eliminating of waste in gov't. There are so many assistants and assistants to assistants in D.C. and elsewhere that it makes me sick to my stomach. Perhaps we can do a Tea Party referendum or two to eliminate some bureaus.
ReplyReport AbuseLynn X #9Monday, February 08, 2010 8:16:55 PMLet's try to be a little more optimistic here. It doesn't hurt to be optimistic even if you are wrong.
sunrye1 is right, if we have enough inflation over time it will wipe out most of the national debt. We all know we are headed for more inflation. Probably 5% a year. Eventually our national debt would become manageable.
ReplyReport AbuseWilliam 1950 #10Monday, February 08, 2010 8:17:01 PMeach state gets one senator 2 house rep and each gets one paid aide legalize all drugs mmm now cut the DEA by 90 per cent then all the drugs are controlled by the state not the gangs so now the gangs have no way to make money now they disappear mm cut FBI NSA and all other law enforcement in half cut the pentagon budget in half will cause the unemployment to go up but it would bring the budget into check . however , nobody would be that brave to even bring it up ...ReplyReport Abuse1 - 10 of 131PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/JubaksJournal/growth-wont-dig-us-out-of-this-hole.aspx?page=2&','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*That budget assumes 2.7% GDP growth in fiscal 2010. That's reasonable. It's certainly close to the consensus among economists for this year.
But looking out toward fiscal 2014, the budget quickly arrives in fantasyland. The budget projections assume GDP growth of 3.2% to 4.3% for six consecutive years.
And this comes at a time when most economists -- even the optimists at the Federal Reserve -- are worried that this recovery will be weaker than most recoveries after recessions and that the long-term speed limit for growth in the U.S. economy is headed lower. From 1975 to 1995, full trend economic growth in the United States was about 3%. The Fed now estimates the speed limit to growth at 2.5%. Other economists, including those at the Congressional Budget Office, think it's even lower -- 2.3% annually or so.
In other words, the U.S. can't grow itself out of this hole nearly as easily as the Obama administration wishes.And the bad news Slower growth after the recession is one thing arguing against an easy solution, but it's by no means the only thing.
The interest rate the U.S. pays on its debt is rising -- just when the amount of debt has soared.
Cutting the budget looks impossible because our government, especially our wonderful Senate, is gridlocked. I find it hard to imagine how the Senate will pass any kind of budget this year.
Check out the national debt clock
And we don't have a huge window in which to act.
In a Jan. 8 blog post, I wrote about research that argues that when a country's accumulated gross debt rises above 90% of GDP, it starts to reduce a country's economic growth rate by a median of 1 percentage point and an average of 4 percentage points. Under the current trend, the United States will show a debt-to-GDP ratio above 100% by 2012.
A slower economic growth rate caused by high debt levels makes it even harder to grow your way out of the hole.
And then, of course, there's the long-term demographic trend. The United States is an aging country. But we're not aging as quickly as most of the developed word or even as fast as some parts of the developing world, such as China. (For more on how the world is aging, see this blog post.) But aging relatively slowly doesn't help in this situation. A country that is aging in absolute terms is getting older and can look forward to a slower rate of economic growth.
If all this makes the situation sound depressingly grave, I'm afraid I've got even worse news: The world's traditional fix for this kind of debt problem when it's the result of a few years of financial mismanagement doesn't work very well when we're looking at a deeper and chronic problem shared by many of the world's countries.
Continued: Will the traditional solution work? More from MSN Money and MoneyShow.com
1 | 2 | next >
Check out Jim's top stocks for the next 12 months.
Read how to invest with Jubak's showcase portfolio.
Follow the long-term portfolio from Jim's book "The Jubak Picks."
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
I don't understand why we don't go after defense spending? I'm all for a strong military, but if the US is in such dire straits, wouldn't it be prudent to reduce the military presence in foreign countries?
We can have the strongest military in the world, but if we owe countless trillions to other countries, how secure and influential are we?
Its sounds to me that there will be tough choices ahead. And given the choice, I would much prefer a "weaker military" and foreign presence to making cuts in social security, medcare, education and such.
i am all for that, but tell this to the US folks, yes the one that goes to the polls on election day, they will go and cast their votes like nothing is happening, see what happened in Massachusetts instead of writing in a candidate, we go for the ones that cause the problem great solution America.
Before you cut SS cut defense spending , we do not need to pay for the defense of Japan, South Korea, Europe, etc etc etc they can pay for their own defense, besides, it is a 1 trillion dollars entitlement for the Republicans, me i do not need the government to defend me, i can do that myself, that's why the right to bear arms., but i also do not need to pay for somebody else defense.
Thanks Jim. Good stuff, scary, but good. I am not much of a global econ dude, but it seems to me that sooner or later buyers of U.S. gov't bonds and bills are going to be few and far between. I used to tell my dad that when he bought T-bills he was just encouraging deficit spending. It peeved him off, but he was in denial about it. Wouldn't it be cool if we could organize a boycott of gov't paper? I also am sure that we could do a lot by eliminating of waste in gov't. There are so many assistants and assistants to assistants in D.C. and elsewhere that it makes me sick to my stomach. Perhaps we can do a Tea Party referendum or two to eliminate some bureaus.
Let's try to be a little more optimistic here. It doesn't hurt to be optimistic even if you are wrong.
sunrye1 is right, if we have enough inflation over time it will wipe out most of the national debt. We all know we are headed for more inflation. Probably 5% a year. Eventually our national debt would become manageable.
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