Thursday, March 11, 2010

Federal budget update

Here's my belated update of the federal budget charts for February, with data that were released yesterday. (Skiing has been fabulous, and extracurricular activities have taken their toll on blogging. We've skiied Breckinridge, Copper Mountain, and Keystone, and Keystone gets our vote for one of the best places we've ever been to.)

The bad news is that the deficit for the 12 months ended February was $1.5 trillion, just over 10% of GDP. There's a study going around that says that deficits become a significant drag on growth once they reach 10% of GDP or so, and that makes sense to me. When the federal government borrows that much, it that effectively soaks up a lot of the economy's savings, which could otherwise have been put to more productive use.

The good news (tough to find, but I don't want to be a partisan hack) is that revenues in February were much higher than they were a year ago, high enough to make the 12-month rolling sum of revenues turn rise relative to the January number. Given the typical pattern following recession ends, we might have seen the low in federal revenues, or something very close to the low. That would help mitigate the size of the deficit, but it is still projected to be huge for many years unless there is a significant change in the direction of policymaking in Washington. If the level of spending relative to GDP starts to decline, that would be real cause for cheer.


Benjamin Cole said...

I am in the camp for a balanced budget, even if that means whacking USDA and Department of Defense outlays, so you know I believe in balanced budgets.
But "crowding out" --that is, federal government sopping up of too much investment capital--doesn't seem to be going on now.
The world is flush with capital, thanks to high savings rates in Asia, Europe, and (I contend) higher than reported rates in the US. In the US, due to accounting convention, assets in life insurance companies are not counted as savings, though many people use life insurance as a savings vehicle.

Indeed, the current Niagara of Capital has allowed our wanton ways, as we can borrow all we want on global markets.

The private credit markets, while improving, are still loath to finance anything risky-looking, Venture capital is out there, private-equity etc, but banks are a bit shy. The IPO market is getting better. No one is wanting for capital--they are only wanting for places that make sense to invest.

I contend that this is a secular trend in many regards--high global savings rates will mean lots of capital for growth. China and India are growing and rapidly. SE Asia, Korea and Japan coming along. Globally, the recession is way over.

The US is paying the price of over-investment in housing for generations, an anti-manufacturing mindset, a military empire, and our domestic Red State Socialist Empire of rural subsidies.

We are not building a competitive economy, although we now have lots of nice rural power systems and highways, dams, rural telephones, huge mansions galore, a global network of military bases, and the debt to pay for all of that. Oh, we also blew a trillion or so in Iraq, and Obama is getting ready to match that amount in Afghanistan, another vital nation.

We are lucky in that our old adversary was the Soviet Union--they were even worse run than us, so we prevailed.

I am not sure about China--they seem to be focusing on developing their economy, not their military. As a result. they will likely eclipse us within a couple generation, in most regards.

Let us hope the new giant is peaceful.

randy said...

Our family has skiied Breckenridge for many years now. This is the first year we've skipped in a while as kids spent spring break on school trips. We love Breckenridge, but have never gone to Keystone even though it's so close. My impression was that it was smaller, with fewer options. We will have to try it out now.

Benjamin: good post!

Benjamin Cole said...

Randy-don't encourage me...I have work to do. This is an excellent blog....

Paul said...

"...and our domestic Red State Socialist Empire of rural subsidies."

Says Benjamin, who voted for an actual socialist for President.

Scott Grannis said...

randy: on the contrary, Keystone is huge and has at least a dozen, one-mile-plus runs that are exhilarating and challenging, and tons of variety. Grooming is excellent. You really must try it out some time.