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Why The Debt Limit Deal Didn’t Help Much

August 7th, 2011 . by economistmom

I was on CNN’s “Your Bottom Line” show with host Christine Romans this weekend.  That’s one part of the interview, above, and the transcript of the show is here.  I tried to make my points about the intergenerational inequity of the debt problem (not fair to my kids), the still unaddressed need for entitlement and tax reform (how discretionary spending is such a small part of the budget and the problem), and how there are two sides to the fiscal sustainability “coin” (the get-the-deficit-down side and the grow-the-economy side).  I didn’t get to weigh in on the issue of tax reform, but I was sure itching to do so.  Hopefully I will get another chance to talk about that sometime between now and November when the “super committee” must come up with a second-round plan or else the automatic cuts–still almost entirely on discretionary spending and not entitlement benefits or tax policy–are triggered.

9 Responses to “Why The Debt Limit Deal Didn’t Help Much”

  1. comment number 1 by: rjs

    the true irony of all these new spending cuts is that when all is said & done, they may not reduce the deficit at all…you know that the level of the deficit is determined by the difference between government revenues and outlays, and if the job & spending cuts (which are inherently contractionary) push the country back into a deeper recession, government revenues may fall far enough that the deficits may actually increase; that’s not just my opinion; you saw that the economic policy institute estimates that the debt deal signed this week will end up costing the economy 1.8 million jobs by 2012, and even j.p.morgan estimates that “federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012″; considering our recent GDP reports came in at 0.4% & 1.3%, a 1.5% hit to our current GDP growth rate would indeed put us into another official recession…the only real way to eliminate deficits and our long term debt is to get the country back on a fast growth path, so that in the long term GDP grows enough annually that the debt remaining is trivial by comparison (ie, we never paid off the debts from WWII, but the country grew fast enough in the 50s & 60s that that debt, a greater % of GDP than we have now, gradually diminished as a percentage of the economy)…despite the rhetoric from both parties, we still really dont have a debt problem now; our cost of servicing our debt is low historically…in 2010, interest payments on the debt were 5.7 percent of total government spending; the average for that ratio between 1950 and 2010 was 9.8%…if we had leaders who believed that the country has a future, they would be borrowing even more at a time when they can sell 10 year bonds at 2.4%, and investing the proceeds in the country’s infrastructure and it’s young people…instead, we have leaders who are owned by the plutocracy who’s only interest is to sell the rest of us into an austere debt slavery…

    https://mm.jpmorgan.com/stp/t/c.do?i=19642-7A9&u=a_p*d_645537.html*h_-1ni8eo3

  2. comment number 2 by: Patrick R. Sullivan

    ‘…ie, we never paid off the debts from WWII, but the country grew fast enough in the 50s & 60s ….’

    Following a drastic cut in government spending from 1945 onward. We also released millions of young men back into the civilian labor force, who managed to find something productive to do outside government.

    Maybe there’s a lesson there.

  3. comment number 3 by: rjs

    “We also released millions of young men back into the civilian labor force, who managed to find something productive to do outside government.”

    i’m old enough to remember watching them building the interstate highway system…

  4. comment number 4 by: Patrick R. Sullivan

    Sorry, the interstate highway system was Eisenhower’s deal. He didn’t become president until 1953.

  5. comment number 5 by: rjs

    there were two post war recessions, 45 & 49…the 45 recession took 12.7% off GDP…there was another recession post korea in 53…

    but my point was that the interstate highway system wouldnt have been built without government investing in the future…and that eisenhower only ran one surplus, but look what happened to the debt to GDP ratio during his admin:

    http://delong.typepad.com/sdj/2009/06/the-debt-and-the-deficit-in-historical-perspective.html

  6. comment number 6 by: Patrick R. Sullivan

    The recession of 1945 was not ‘post war’, it began in February and ended in October. We hadn’t even defeated the Germans in February. Demobilization comes about the same time recovery begins.

    The point being that the economy performed well AFTER drastic cuts in government spending. A rather spectacular refutation of the idea that such cuts are contractionary.

  7. comment number 7 by: Arne

    “Demobilization comes about the same time recovery begins.”

    If you want to understand the impact of WW2 military spending on the economy you should look at new orders and production. Peak production was around D-Day, June 6, 1944.

  8. comment number 8 by: rjs

    “the idea that such cuts are contractionary” wasnt my idea; it was jp morgan’s; the above link works if you paste it in your browser…go argue with them:

    “federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012?

  9. comment number 9 by: Patrick R. Sullivan

    Repeating other’s claims is not analysis, it’s a common logical fallacy; Appeal to Authority.