Bull Bear Trader

A recent AP article by Martin Crutsinger introduces and then answers the question "How did (the) $1 trillion deficit happen?" (see full AP article). Some highlights from the article include:

• The government's annual budget deficit has topped $1 trillion. With three months left in the budget year, it will get even worse. The administration is projecting that the deficit will hit $1.84 trillion for the current budget year. This is four times the size of last year's budget deficit.

• The deficit spending began with the 2001 recession, and got deeper with the 9-11 terrorist attacks as war spending started to ramp up.

• Until 2008 the deficit had been shrinking, hitting a five-year low of $161.5 billion in 2007, but was followed by the record deficit of $454.8 billion in 2008 as the current recession and financial crisis hit.

• The size of the deficit started to ramp up with the initial $700 billion TARP (about half spent in 2008, half in 2009), along with the recent $787 billion economic stimulus.

• In addition to stimulus spending,"automatic stabilizers," such as food stamps and unemployment compensation, are also increasing. Government outlays are up 20.5% through the first nine months of this budget year.

• All of this spending is occurring just as tax receipts are falling. Government revenues have fallen by 17.9% during the October-to-June period compared with one year ago.

• While large in dollars, current deficits are still not the largest in terms of GDP, but are the largest outside of WWII. Currently, the CBO is forecasting the budget deficit will equal 13% of GDP. As a comparison, the deficit was 6% of GDP in 1983 as we moved out of another recession and ramped up cold war spending, and 30.3% of GDP in 1943 during World War II.

• The CBO is projecting that the deficits will remain large for the foreseeable future, coming in at $1.43 trillion in 2010 and not falling below $633 billion over the next 10 years, ultimately adding $9.1 trillion to the national debt.

To tackle such deficits and debt, either spending needs to be curbed, or tax receipts need to increase - and quickly. Either way, the debt needs to be dealt with (see previous post), but the exit strategy will require hard choices (see Greenfaucet article). Given continued weakness in the economy, along with both health care reform and new global warming initiatives (such as carbon trading) on the docket, it does not appear that spending is going to slow down anytime soon (see previous post). The leaves tax increases on the wealthy and corporations, or additional tax cuts such as those recently targeted for the middle class. Expect the Supply Side - Keynesian debate to begin in earnest once again.