deficit reduction and economic growth: are they mutually ... · deficit reduction and economic...

Deficit Reduction and Economic Growth:

Are They Mutually Exclusive Goals? Tuesday, May 1, 2012; 2:30 PM - 3:45 PM

Moderator: Gillian Tett, U.S. Managing Editor, Financial Times

Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and

Policy Priorities; former Chief Economist to Vice President Joe Biden

Douglas Holtz-Eakin, President, American Action Forum; former Director, Congressional Budget

Office; former Chief Economist, Council of Economic Advisors

Edward Lazear, Professor, Stanford University; Senior Fellow, Hoover Institution; former Chairman,

Council of Economic Advisors

Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S.

Secretary of the Treasury

1

http://www.milkeninstitute.org/events/gcprogram.taf?function=bio&EventID=gc12&SPID=7710








Jared Bernstein’s slides

2

Source: Piketty, Saez, Stantcheva, 2011

Saez et al: Lowering top marginal tax rate

associates with greater ineq, not faster growth

4

Source: OMB 5

Edward Lazear’s slides

8

GDP trend in the United States

1947-2011

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4

4.1

4.2

1947

q1

1948

q4

1950

q3

1952

q2

1954

q1

1955

q4

1957

q3

1959

q2

1961

q1

1962

q4

1964

q3

1966

q2

1968

q1

1969

q4

1971

q3

1973

q2

1975

q1

1976

q4

1978

q3

1980

q2

1982

q1

1983

q4

1985

q3

1987

q2

1989

q1

1990

q4

1992

q3

1994

q2

1996

q1

1997

q4

1999

q3

2001

q2

2003

q1

2004

q4

2006

q3

2008

q2

2010

q1

Log of Real GDP

Source: Bureau of Economic Analysis.

9

The recent trend

10

The effect of the stimulus

11

The US debt

12

Steven Rattner’s slides

13

Source: CBO

21.0%

18.0%

15.4%

24.1%

Federal revenues vs. spending (% of GDP)

14

Source: BEA, National Patterns of R&D Resources

0.89%

0.23%

Federal spending on infrastructure and R&D (% of GDP)

15

Additional slides

16

U.S. debt and deficits

Historical perspective

Source: Milken Institute.

-40

-20

0

20

40

60

80

100

120

140

1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010

U.S. federal deficits and debt - 1790 to 2010

Federal public debt

Federal surplus/deficit

% GDP

War of 1812

World War I(1914-1918)

World War II(1939-1945)

Great Depression(1929-late 1930s)

Mexican American War

(1847-1848)

Civil War(1861-1865)

SpanishAmerican War

(1898-1899)

Great Recession

(2007-2009)Vietnam War(1961-1975)

Korean War (1950-1953)

U.S. federal income tax introduced

(1913)

17

U.S. government spending, revenue

and deficits Historical perspective

Source: Milken Institute.

-40

-30

-20

-10

0

10

20

30

40

50

1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010

U.S. federal government spending and revenue - 1790 to 2010

Surplus/Deficit

Revenue

Spending

% GDP

War of 1812

World War I


Great Depression(1929-late 1930s)

MexicanAmerican War

(1847-1848)

Civil War(1861-1865)

Spanish American War(1898-1899)

Great Recession(2007-2009)

Vietnam War(1961-1975)

Korean War (1950-1953)

U.S. federal income tax introduced

(1913)

18

Deficit is projected to decline remarkably

under the baseline scenario

Source: U.S. Congressional Budget Office.

-11

-9

-7

-5

-3

-1

1

3

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Actual

Alternative fiscal scenario

Projected

CBO's baseline projection

% GDP

19

Deficit projected under CBO’s baseline and

alternative fiscal scenario

-8

-7

-6

-5

-4

-3

-2

-1

0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

% GDP

Baseline

Extend Tax Policies

Prevent Spending Cuts

Additional Debt Service


20

U.S. budget deficits/surpluses

CBO versus Administration projections

-12

-10

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

% GDP


Administration's projection

Sources: U.S. Congressional Budget Office, Office of Management and Budget, White House.

21

Federal debt held by the public rises to

the WWII level under alternative fiscal scenario

0

20

40

60

80

100

120

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

% GDP


Alternative fiscal scenario



22

U.S. gross public debt is roughly equal

national income

Source: White House.

23

0

20

40

60

80

100

120

1961 1966 1971 1976 1980 1985 1990 1995 2000 2005 2010 2015

% GDP

Gross Federal debt

Federal debt held by public

Federal outlays by major category

Source: Department of the Treasury and Office of Management and Budget.

Defense18.9%

Health and medicare

22.3%

Income security15.3%

Social security20.5%

Net interest5.9%

Other17.1%

Federal outlays: US$3.8 trillion (2012)

24

Federal revenues by major category

Source: Department of the Treasury and Office of Management and Budget.

Individual income taxes47.2%

Corporation income taxes

9.6%

Social insurance (payroll) taxes

34.1%

Other revenue sources

9.2%

Federal revenues: US$2.5 trillion (2012)

25

Federal revenues by category

Actual and projection

0

2

4

6

8

10

12

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

% GDP

Individual income taxes

Social insurance (payroll) taxes

Corporate income taxesOther revenue sources

Projection


26

U.S. labor market conditions are improving

-1000

-800

-600

-400

-200

0

200

400

600

2007 2008 2009 2010 2011 2012

Thousands of workers

Total nonfarm employment(one-month net change, seasonally adjusted)

Source. Bureau of Labor Statistics.

27

Unemployment rate remains high

Source. Bureau of Labor Statistics.

0

2

4

6

8

10

12

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Civilian unemployment rate (%)

8.2% in March, 2012

%

10.8% during the 1981-1982 recession

10.1% in October , 2009

28

Weak recovery compared with

previous recoveries

Sources: U.S. Bureau of Labor Statistics, Milken Institute.

-8

-6

-4

-2

0

2

4

6

8

10

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51Months after the start of recession

Percent change in total nonfarm employment from the start of recession

2007-09

2001

1981-82

1973-75

1990-91

%

29

Weak economic recovery?

Compared with previous recoveries

3.3 %

1.9%

2.6%

7.8%

6.2%

10.9%

2007-2009

2001

1990-1991

1981-1982

1973-1975

1929-1933

Average real GDP growth rates (%) in the four quarters

following each recessionPeriods of Recession

Real GDP grew10.9% in 1934, the year after the Great Depression ended.

Source: Bureau of Economic Analysis, U.S. Department of Commerce, Milken Institute.

30

U.S. households still carry too much debt,

but continue deleveraging

Source: Federal Reserve.

31

0

50

100

150

1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

U.S. household debt (% of disposable personal income)%

Ownership of U.S. Treasury securities % of gross Treasury debt

Intra-U.S. government

30.8%

United States36.3%

China7.6%

Japan7.1%

Oil exporters1.7%

Brazil1.5%

Other foreign15.1%

Total gross federal debt: US$15.5 trillion (February 2012)

Source: Treasury Department.

32

Ownership of publicly held U.S. debt

Source: Treasury Department.

United States52.4%

China11.0%

Japan10.2%

Oil exporters2.5%

Brazil2.1%

Other foreign21.8%

Total federal debt held by the public = US$10.7 trillion (February 2012)

33

U.S. economy expands at a slow rate

Source: Bureau of Economic Analysis, U.S. Department of Commerce.

-6.7

-0.7

1.7

3.8 3.9 3.8

2.5 2.3

0.41.3

1.8

3.02.2 2.2 2.5 2.5 2.15

-8

-6

-4

-2

0

2

4

6

Q1

2009

Q2 Q3 Q4 Q1

2010

Q2 Q3 Q4 Q1

2011

Q2 Q3 Q4 Q1

2012

Q2 Q3 Q4 Q1

2013

Real GDP growth (%) (Quarterly percentage change, seasonally adjusted at an annual rate)

Consensus forecast

%

34

Annual inflation has declined,

but core inflation continued to rise

35

Source: Federal Reserve Bank of St. Louis.

-3

0

3

6

2005 2006 2007 2008 2009 2010 2011 2012

CPI, excluding

food and energy

Annual rate (%)

Consumer Price

Index (CPI), total

U.S. Treasury yields remained low by

historical standards

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

Percent Interest rates on U.S. Treasury securities

10-year

2-year

Source: Federal Reserve.

36

Real interest rate is near zero; negative in

some periods

Sources: Federal Reserve, Federal Reserve Bank of St. Louis.

-4

-2

0

2

4

6

8

10

12

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% Real 10-Year Treasury yield

37

U.S. economic indicator watch

2011 2012(F)

Real GDP growth (%) 1.70 2.30

Inflation (%) 3.17 2.40

Unemployment (%) 9.00 8.20

Budget balance (% GDP) -8.20 -7.20

Federal funds rate (%) 0.25 0.25

10-year Treasury yield (%) 1.88 2.57

Source: Bloomberg.

38

High public debt-to-GDP ratios in

many advanced countries

1026

44

66 68 8299 99

107 103 105120

161

230

0

50

100

150

200

250

Gross public debt (% of GDP)

Advanced economies

Emerging markets

Source: Bloomberg.

39

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