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Living Within Our Means: Economist Magazine Edition

October 24th, 2008 . by economistmom

Thanks to reader Brooks for pointing out this Economist magazine column to me.  (I’m on the road and my (husband’s) Economist magazine is sitting at home somewhere.)  Some excerpts (emphasis added):

…the financial bust is almost certain to crush the government’s tax take. It has already started: the budget deficit for fiscal 2008 (which ended on September 30th) was $455 billion, or 3.2% of GDP, much more than the $389 billion projected in July. Much of the shortfall appears due to lower taxes on profits and the wealthy…

Then there’s the prospect of additional fiscal stimulus, which won support on October 20th from Ben Bernanke, the Federal Reserve chairman. The Democrats in Congress, who already have a $61 billion package in the works, are now suggesting $150 billion. Barack Obama has proposed up to $190 billion over two years, and would merge that proposal with Congress’s one should he become president…

The $700 billion Troubled Asset Relief Programme (TARP) will also add to the deficit, though less than might appear…Since [Treasury] plans to invest $250 billion in bank equity, the addition to the deficit this year will be at least that much.

This all threatens to add up to a deficit of at least $1 trillion, or nearly 7% of GDP, this fiscal year, a figure that is likely to force the next president to postpone some of his more ambitious proposals. Still, even fiscal hawks concede a higher short-term deficit is a tolerable price for avoiding a potential depression—though a 7% deficit is probably testing their tolerance. And at present the American government can borrow at absurdly low interest rates…

Yet it cannot take its lenders for granted. This year, the Treasury may have to raise more than $1.4 trillion in debt, according to Morgan Stanley, to finance not just the deficit but the TARP and the Federal Deposit Insurance Corporation…

America has long borrowed without fear of a backlash, thanks to lenders’ lack of attractive alternatives. And it may for a while yet: much of the private sector either can’t borrow or doesn’t want to, and other countries also face yawning deficits, making them far from attractive. The national debt, at 38% of GDP, is well below its 1990s peak of 49%. But much of the deficit is still financed by foreigners, and global capital flows are now being rocked by the financial crisis. The next president will no doubt find deficits at 7% or more of GDP sobering enough. Without a plan for cutting that high figure back once the financial crisis and the recession pass—and with the inexorable climb in Medicare and Social Security costs as the baby-boomers retire now under way—investors may need to be compensated much more than they are now to keep on buying America’s debt.

Compare with the issue brief the Concord Coalition released on Wed. (10/22)–and my blog post on it–and you should notice a lot of overlap.

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