Economic Commentaries

Entries for February 2012


In late 2009 we conducted an in-depth study of the fiscal condition of the United States. We found it rather terrifying and we concluded that the country was about to end an era of twelve digit budget deficits (multi billions) and begin an era of thirteen digit budget deficits (trillions). The consequences of this would be to severely limit the government's options to fight the business cycle and ultimately to severely constrain its preeminence as a world power.

Since that analysis the U.S. economy has embarked on an economic recovery that has been sub-par by the standards of post World War II business cycles. Indeed growth was only about 2% in 2010-2011 and worse, nominal growth was below 4%. To some observers this record is akin to a depression, exposing the impotence of monetary and fiscal policy to revive the economy. To others it is a failure of fiscal stimulus to be sufficiently large to lift the economy out of its funk.

In either case the result is that through 2012 the federal government will have run a fourth consecutive year in which the budget deficit exceeds $1 trillion. In this period federal spending has climbed to roughly 25% of GDP versus its post war norm of about 20%. Federal revenue has fallen to about 15% of GDP versus its post war norm of about 18%. Despite this dismal record a recent CBS/N.Y. Times poll showed a drop in those surveyed expressing a concern about the federal budget deficit. Nevertheless the deficit is commanding the attention of aspirants for the Republican nomination, castigating its size and the recklessness of federal spending. So the budget deficit will undoubtedly be a topic for debate in the approaching election campaign. But in the meanwhile the President has seemingly responded to the most recent polls by offering a budget for fiscal 2013 and beyond that does little to address the structural ills that are imperiling the U.S. fiscal condition.

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