Obamanomics and Budget Worries by smi10004

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									Obamanomics and Budget Worries


     Lecture by Robert M. Coen
   Emeritus Professor of Economics
      Northwestern University

          January 27, 2010
            Bush/Republican Legacy

• High, rising unemployment
• Large, growing output gap
      $150b fiscal stimulus in early 2008
      Mostly tax cuts, short-lived
• Shaky (collapsing?) financial system
      $700b TARP to rescue in late 2008
• Two wars – military spending up ~$400b/yr
• New under-funded programs, e.g., drug benefits
• Federal tax system emasculated in 2001 and 2003
      Top Y rate cut from 39.6% to 35%
      Top rate on K-gains and dividends cut to 15%
• Large, growing budget deficits
                            Unemployment Rate, 2000M1-2009M12
                              Unemployment Rate, 2001M1-2009M12
            11
              11

            10
              10

             9
                 9

             8
  Percent




                 8
Percent




             7
                 7

             6
                 6

             5
                 5

             4
                 4 01     02     03     04      05    06     07     08     09
                     01     02     03     04      05    06     07     08     09
                                               Year
                                                 Year
                         Unemployment Rate, 1948M1-2009M12

          11

          10

          9

          8

          7
Percent




          6

          5

          4

          3

          2
               50   55   60   65   70   75    80    85   90   95   00   05

                                             Year
                               Real GDP, 2001Q1-2009Q3

                                   Billions of 2005 Dollars

           13,600


           13,200


           12,800
Billions




           12,400


           12,000


           11,600


           11,200
                    01   02   03      04      05      06      07   08   09

                                            Year
             Federal Government Receipts, Expenditures, Surplus, 2000Q1-2009Q3
               Federal Government Receipts, Expenditures, Surplus, 2000Q1-2009Q3
                                     Percent of GDP
                                       Percent of GDP
            30
              30
            25
              25
            20
              20
            15
              15
  Percent
Percent




            10
              10
             5
                 5
             0
                 0
            -5
                 -5
            -10
              -10 00   01   02   03   04    05   06   07    08    09
                    00   01   02   03   04    05   06   07    08    09
                                       Year            Receipts
                                         Year            Receipts
                                                       Expenditures
                                                         Expenditures
                                                       Surplus
                                                         Surplus
              Federal Government Receipts, Expenditures, Surplus, 1948Q1-2009Q3
            Federal Government Receipts, Expenditures, and Deficit,1947Q1-2009Q3
              Federal Government Receipts, Expenditures, and Deficit, 1947Q1-2009Q3
                                       Percent of GDP
                                      Percent of GDP
                                        Percent of GDP
            30
             30
              30
             25
            25
              25
             20
            20
              20
             15
            15
              15
  Percent
  Percent
Percent




             10
            10
              10
             55
                  5
             00
                  0
             -5
            -5
               -5
             -10
            -10
               -10 50 55 60 65 70 75 80 85 90 95 00 05
                    50 55 60 65 70 75 80 85 90 95 00 05
                     50 55 60 65 70 75 80 85 90 95 00 05
                                     Year
                                    Year         Receipts
                                                Receipts
                                      Year        Receipts
                                                 Expenditures
                                                Expenditures
                                                  Expenditures
                                                 Surplus
                                                Surplus
                                                  Surplus
                                Federal Government Debt, 1952Q1-2009Q3

                 70



                 60
Percent of GDP




                 50



                 40



                 30



                 20
                      55   60     65   70   75   80     85   90   95   00   05

                                                 Year
                        Debt of Domestic Nonfinancial Sectors, 1952Q1-2009Q3
                                  Government + Households + Business

                 260


                 240


                 220
Percent of GDP




                 200


                 180


                 160


                 140


                 120
                       55   60   65   70   75   80     85   90   95   00   05

                                                Year
                                  Household Debt, 1952Q1-2009Q3

                 100

                  90

                  80
Percent of GDP




                  70

                  60

                  50

                  40

                  30

                  20
                       55   60   65   70   75   80     85   90   95   00   05

                                                Year
    Fiscal Stimulus Needed – How Much?
How large was the output gap in early 2009?
My rough calculation:

      Potential labor force                    156 million
      Full-employment unemployment rate                 4%
      Potential employment                     150 million
      Potential productivity (GDP/E)            $103,000
      Potential GDP                           $15.5 trillion
      Actual GDP                               14.2 trillion
      Output gap                                1.3 trillion

Administration estimated $2tr average gap over 2009-10

How large are the multipliers of G or T?
              Obama Fiscal Stimulus

$787 billion, enacted Feb. 2009, no Republican votes for

  Personal tax cuts 288
  Business tax cuts  51
  Healthcare        148
  Education          91
  Aid to poor        83
  Infrastructure     81

Too small? Too much tax cut? Too delayed?
Not sufficiently targeted at employment?
  CBO: Baseline Federal Budget Projection

                   2010-14          2010-19
Total deficit       $3,988           $7,137
($ billions)

                   2010      2014        2019
Deficit/GDP         9.6       3.2         3.4
(Percent)

Debt/GDP           61.4      66.0        67.8
(Percent)
   CBO: Effects of Alternative Policies on Deficit
                     (Billions of dollars)


                                     2010-14        2010-19
Baseline deficit                      $3,988         $7,137

Iraq-Afgan cut to 30,000 by 2013             -374    -1,074
Freeze discretionary spending                -203      -950

Extend expiring Bush tax cuts         +1,640         +4,090
Index AMT for inflation                +177           +448
              Markets Not Spooked

•   Interest rates not spiking
•   Dollar not plummeting
•   Inflation dormant
•   Why?
        Debt/GDP not excessive
        Federal interest payments modest relative to
                    tax revenue
        Strong demand for US public debt
        Confidence is US problem-solving
                    Yield on 10-Year U.S. Treasuries, 1953M4-2009M8

                                          Percent
          16


          14


          12


          10
Percent




          8


          6


          4


          2
               55     60   65   70   75    80     85   90   95   00   05

                                           Year
     Total Public Debt as Percent of GDP, 2008



                     France     68
                     Germany    64
                     Japan     173
                     Sweden     37
                     UK         52
                     US         61

Source: CIA World Fact Book
                    Federal Interest Payments, 1947Q1-2009Q2

               Percent of Tax Receipts (excl. Social Insurance Taxes)
          40


          35


          30


          25
Percent




          20


          15


          10


          5
               50   55   60   65   70   75   80   85   90   95   00   05

                                         Year
         What Is Sound Budget Policy?

Republican approach: Cut taxes, starve the beast

Balance the budget?
Balance current budget, borrow for capital expenditures?
Balance the budget over business cycle?
Keep debt/GDP ratio at “safe” level?
Functional finance?

Modest tax increases, spending restraint can bring balance
Historically and compared to other nations, US taxes low
                    Federal Personal Income Taxes, 1947Q1-2009Q3
                              Percent of Personal Income

          13


          12


          11


          10
Percent




          9


          8


          7


          6
               50   55   60   65   70   75   80   85   90   95   00   05

                                         Year
                    Federal Corporate Profits Taxes, 1947Q1-2009Q3
                              Percent of Corporate Profits

          70


          60


          50
Percent




          40


          30


          20


          10
               50   55   60   65   70   75   80   85   90   95   00   05

                                         Year
                          Federal Indirect Taxes, 1947Q1-2009Q3
                                      Percent of GDP

          3.5


          3.0


          2.5
Percent




          2.0


          1.5


          1.0


          0.5
                50   55   60   65   70   75   80   85   90   95   00   05

                                          Year
                   Federal Social Insurance Taxes, 1947Q1-2009Q3
                             Percent of Personal Income

          9

          8

          7

          6
Percent




          5

          4

          3

          2

          1
              50   55   60   65   70   75   80   85   90   95   00   05

                                        Year
            Key Comparative Ratios
                   2006
                 Taxes             Income tax Consumption
                 to GDP             to total tax* to GDP

France               44                  49       55
Germany              36                  52       57
Japan                28                  66       56
Sweden               49                  60       46
UK                   37                  58       62
US                   28                  74       70

* Excluding property and social insurance taxes
Source: OECD
How We Could Impair the Economic Well-being of
            Future Generations

Bequeathing less capital
Bequeathing a less educated, less healthy
 workforce
Bequeathing less scientific, engineering, and
 managerial knowledge
Bequeathing fewer natural resources
Accumulating foreign debt to finance current
 consumption or unprofitable investment

								
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