No Debt Fix In Sight

The election is over, the fiscal cliff is over, and the problems remain.

For the past several years on this blog I have been showing simple charts to monitor progress—or lack of progress—on the persistent deficit and the growing debt, which in my view are impediments to returning to strong economic growth. Unfortunately neither the election nor the fiscal cliff deal has resulted in any meaningful change in these budget charts.

Here is the latest spending chart. It shows the Administration’s spending proposal prior to the debt deal of 2011, a CBO forecast with the fiscal cliff deal, and my pro-growth alternative which would balance the budget.

Clearly we still have a long way to go to bring spending growth down and thereby reduce spending as a share of GDP. The battle in Washington in the next few years will be where between the black and the green line we go.

Note that the CBO forecast is based on its alternative fiscal scenario, which is very close to what actually happened in the so-called fiscal cliff deal. As the CBO stated in their August 2012 report “That scenario incorporates the assumptions that all expiring tax provisions (other than the payroll tax reduction in effect in calendar years 2011 and 2012) are extended; the alternative minimum tax (AMT) is indexed for inflation after 2011; Medicare’s payment rates for physicians’ services are held constant at their current level; and the automatic spending reductions required by the Budget Control Act of 2011 (Public Law 112-25), which are set to take effect in January 2013, do not occur.”

Moreover, the tax increase in the fiscal cliff deal has not affected the budget deficit in any substantial way. The assumption is that this tax increase will raise revenues by about $600 billion over ten years—probably an over statement as people adjust to the higher rates. But even that $600 billion is only .3 percent of GDP which is expected to be about $201,000 billion over that ten year period. This would hardly be noticeable in the spending chart.  So the scary the 2012 fix the debt chart and 2009 fix the debt video still apply in 2013.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

1 Comment on No Debt Fix In Sight

  1. Currently CBO has a 950 billion dollar deficit project. However first three months of the year have passed and it is at 500 billion. I am projecting a 1. 3 trillion dollar deficit unless severe cuts in spending are made. Do not expect that type of event to occur for so much was compromised on with slight tax hikes on the rich. Hard to believe that the Democrats are going to knock themselves out cutting spending on butter programs.

    Forgot to mention that mutual fund purchases usually come in the second week of January. Apple is many stock mutual funds, so look for demand to increase for Apple over next three weeks. Earnings will be of utmost importance.

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