Budget Deficit: $9 Trillion May Not Be the Whole Iceberg

Paul Krugman may not be that concerned by the Obama administration’s new projection that the unified federal budget deficits will sum to $9 trillion dollars over the next 10 years. But I am.

Here’s the argument Paul Krugman gave for why $9 trillion maybe isn’t as huge a sum as it sounds:

even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.

Political Math (hat tip: Russ Roberts) takes a closer look at Paul’s first comparison:

implicit in his observation is the concept that since we did fine after WWII, we’ll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world…. Back in 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

And whereas in 1945 Americans could reasonably look ahead to a huge decrease in military expenditures, in 2009 when I look ahead what I see is a looming increase in federal medical expenditures.

I also believe it is relevant to compare these deficits not just with GDP but also with current federal tax revenues. $1 trillion is approximately the total personal income tax receipts of the federal government in 2006. My preferred metric for what each additional trillion dollars would require from me personally is to take what I paid in federal income taxes in 2006 and double that amount. To pay off $9 trillion, I’d have to do that for 9 years.

Unfortunately, $9 trillion may not be the whole iceberg. Diane Lim Rogers highlights the Concord Coalition estimate that current policy would imply a cumulative $14.4 trillion deficit over the next ten years.

You also can’t ignore the off-balance sheet federal liabilities, such as the $5 trillion in debt and loan guarantees from Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). A quarter trillion dollars worth of those loans we’ve guaranteed are currently nonperforming. That’s just Fannie and Freddie — doesn’t include FHA, FDIC, Federal Reserve…

If the government tries to double taxes on people like me, it’s in real political trouble. If it doesn’t try to double taxes on people like me, it’s in real solvency trouble.

It looks like we may have a problem here.

$9 trillion– what, me worry?

Graph: Political Math

About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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