"Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances."
And here are the data, first deficits which are flows, expressed as dollars per year, and currently running about $1.2T per year. I'm not seeing any evidence of any $2.5T reduction in the deficit.
And then the debt, which is a stock, an accumulation of all the deficits, expressed in dollars and now above $15T, more than a years worth of GDP.
(Note: Quarterly GDP numbers are annualized.)
It is difficult for me to reconcile a deficit running
consistently greater than a trillion dollars a year with the president’s claim
that, “Over the last few years, both parties have worked together to reduce the
deficit by more than $2.5T.” Deficit is
always expressed as dollars per unit of time. Is he suggesting that, had that work not been
done, the current deficit would be $3.5T to $4.0T per year? That doesn't make sense.
I think what he is suggesting is that there were some
spending and revenue projections, not real numbers, but just projections, that
looked really bad over the next ten years.
Some small adjustments were made that make those projections look less
bad, by about $2.5T cumulative over the ten year period or an average of $250B
per year. I think he is suggesting that
the annual deficits may be lower than they might have otherwise have been but
still may be bigger than they are this year.
And the debt will continue to grow, in absolute numbers for sure, and probably
as a percent of GDP as well. That is 100% bad news.
The bottom line is that, despite the president’s
implications, actual spending has not been and is not proposed to be cut and tax revenues
may or may not actually increase. All
the numbers being quoted are future estimates or projections and may be
considered fictitious.
And, there seems to be a complete lack of understanding that
deficits are flows, dollars per unit of time, and that those deficits
accumulate in debt, a stock, with a unit of dollars. It is growth in the debt, relative to GDP,
that is the problem, and reducing the
deficits may or may not result in any reduction in debt as a percent of GDP, depending on how GDP (which is a flow) grows.
If you are a bit of a nerd, you can read more here about stocks and flows including a discussion of deficits and debt. I hope somebody in Washington is familiar
with these concepts.
At least the president is not planning on additional spending. Spending was mentioned about four times in the speech, always in connection with cutting same, while investing is mentioned about a dozen times, always in connection with increases. I wonder if there is a clear understanding of the differences between spending and investing.
At least the president is not planning on additional spending. Spending was mentioned about four times in the speech, always in connection with cutting same, while investing is mentioned about a dozen times, always in connection with increases. I wonder if there is a clear understanding of the differences between spending and investing.
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Amen! Great analysis! Our President is clueless on financial matters, or is he brilliant to know how to spin such untruths.
ReplyDeleteI think he is brilliant rather than clueless. But the dreams of our president, if realized, will lead to nightmares for the USA.
DeleteNightmares! I think the near term goal is job creation and growth. As an expert in economics, you should know that significant reductions in government spending at this point in time will lead to a significant economic contraction, and job loss. There is no plan for job creation coming from the president's political opposition - none. I won't even comment on the false assertionb that the significant deficit issues during the Bush administration was due to a "government" induced mortgage crisis. This assertion shows a complete lack of understanding of the mortgage backed bond market.
ReplyDeleteRecommended reading for analysis of the mortgage crisis: http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/B0085RZF5K/ref=cm_cr_pr_product_top
DeleteAnd, I wonder why an almost doubling of government spending since 2000 has not created prosperity. And, I wonder, if increased government spending is the solution, how much is enough. I outlined in the previous post what is required for increasing demand for employees, an outcome much preferred over "created" jobs.
DeleteObama's speech writer or he himself was unclear when he spoke this quote. He was referring to a notion put forward mostly by the CBO that we need to cut the total annual deficits that will be racked up over the next ten years by a grand total of $4 T. In other words if, for example, we run a $1T deficit for 10 years, then over than period we would add $10T to total debt and the suggestion is that we need to cut that total number by $4T.
ReplyDeleteHis way of referring to this assumed the listener understood the back story, but in fact the public doesn't. That is the craftiness in the quote, not the fact that he apparently "mis-spoke".
Regarding deficits and spending, just look at nominal GDP and you'll see that is was flat last year, but that doesn't take into account interest on the debt which makes a big difference. To truly solve, foret solve but just move in the right direction, we would have to cut nominal spending by more than interest expense and that could only be achieved mathematically by cutting entitlement spending.
Well, as I commented above, I believe President Obama is a brilliant person but perhaps has a tendency to be somewhat deceptive or manipulative through use of carefully chosen words. He knows what he wants, and is working very hard to get it, and is having some success using skills he learned as a community organizer. Who can blame him for that? I just wish he wanted something different.
DeleteCertainly government "allowed" the mortgage crisis but there was no mention on your part of the other sources as well. In fact, in your reference, a summary states: They (the book) expose the role played not only by Fannie Mae executives but also by enablers at Countrywide Financial, Goldman Sachs, the Federal Reserve, HUD, Congress, and the biggest players on Wall Street, to show how greed, aggression, and fear led countless officials to ignore warning signs of an imminent disaster. Secondly, because of the historically low interest rates there was an insatiable demand of MBS from China and others. You seem to be claiming that the private sector is permitted to be irresponsible and the govenment must never permit them to bend the law and do dumb things. If you leave your front door open and some one robs you then it's your fault as you induced the robbery. The felon is clean.
ReplyDeleteI am not for irresponsible spending but why start two wars and a new social program and cut taxes - that's asking for trouble. I just don't see significanly cutting spending at a time when the economy is on the edge and will just lead to a recession. This will further aggavate the deficit not improve the situation.
I believe Representative Frank and others encouraged rather than allowed the irresponsibility in the name of equality and more people achieving the great American dream of home ownership. We all agree that the financial industry needs strong regulation and oversight because there are unlimited ways around regulations.
DeleteYou seem to think I am a defender of the actions of George Bush, but I have explained in blog posts that the tax cuts he wanted should have gone to debt reduction, the wars he initiated should have been funded with special taxes, and the drug bill should never have been passed. In addition, he should have kept his veto pen handy.
You are correct; there were many politicians who encouraged the approval of mortgages for the lower income class of citizens. I was simply objecting to a label on your graph which seemd to me to lay the debacle completely on the government. There was enough blame to go around.
ReplyDeleteIt seems to me that whenever trends on your graphs are good during a republican administration their noted with the "Reagan Years" or such - not massive deficit spending. When they are good during a democratic president's administration, their labled the dot.com bubble. And when things go bad in a republican admintration, it's not the "Bush years" but some crisis which he seems to have had no role in.
The fact that we had massive budget deficits during the Bush administraion because of excessive spending, and that when Obama became President the wars and the Medicare Part D still had to be funded seems to be ignored by Obama's critics.
Policies can be argueable by folks who have different viewpoints without making everything bad that happens associated with some government policy (only in liberal adminstrations). Sometimes bad things in the economy are caused by irresponsibility on the part of banks and other private sector institutions as well.
Well, this chart from a previous post is fairly non-partisan, even saying the prosperity during the Reagan years was based on borrowed funds and deficit spending with no mention of Reagan's optimism and positive attitude and emphasis on personal responsibility which I believe helped the country. And, no mention of Obama or Bush or any other president in this chart. http://www.permanentfixes.com/2013/02/state-of-union-address-ideas.html
DeletePresident Reagan was certainly optimistic but I don't think his newly coined phrase "welafre queen" in discussing personal responsiblity was very helpful at all. As a president in general, I think he is highly overrated by the loyal right but everyone is entitled to their opinion.
ReplyDeleteHow about some cheery news. Every Saturday, I review my investments and I try to determine amongst a wide range of data as to economic outlook for the near term. My overview today:
ReplyDeleteThe housing market is rebounding. with home building activity rising to the strongest levels in five years.
The employment picture is brightening. Home Depot is hiring 80,000 new workers. Silicon Valley job growth has reached very significant growth levels again—signaling even greater job growth globally in the tech sector.
The services sector has just hit a seven-year high in value, which continues to point to a growing economy.
Recent earnings reports indicate that this growth is widespread. For example: DuPont just beat earnings estimates again, with $10 billion in gross profits. Johnson & Johnson, beat analyst estimates and is registering 1,077% earnings growth. Travelers Insurance just set multiple year while nearly doubling investors’ money over the last three years. When you add to that the fact that Google, IBM, Texas Instruments, and United Technologies are exceeding expectations as well, the business economy is looking bright.
In my view,to kill this growth in the near term, and set us backwards is either a sequester or massive cuts in government spending.just as they are doing in negative-growth Europe.
I realize and agree that we need to get a handle on the deficit but let's wait a while until we can get a lot of folks back to work. I know that the politicians of both parties don't like to cut back during the years of prosperity but now is not the time - it will only aggravate the situation.