Paul Krugman: Further Notes on ONE TRILLION DOLLARS
http://krugman.blogs.nytimes.com/2012/12/15/further-notes-on-one-trillion-dollars/
Mr. Krugman makes a good case that those who invoke the "$1 Trillion" argument about the budget don't know what they're talking about.
For starters, we need to be aware that we dont need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.
That still leaves $700 billion. Wheres that coming from?
OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP what the economy would have produced at full employment was $16.5 trillion over the same period. And if the economy had been at more or less full employment, we wouldnt just have collected taxes on the additional income; historically, the tax share of GDP varies strongly with the business cycle. If the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.
Meanwhile, on the spending side, a large part of the rise in spending came from income security payments in this case, basically unemployment insurance and food stamps which surged due to high unemployment, but are already coming down. Heres what happened:
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Put these together: $400 billion that doesnt increase the debt-GDP ratio; $450 billion or so in slump-related revenue loss; $150 billion or more in slump-related expenses; and guess what: the ONE TRILLION DOLLARS is basically just a depressed-economy story, having nothing to do with any fundamental mismatch between what we want and what were willing to pay.