RE: Debt reduction also creates fiscal space

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

According to the CBO web page, historical data (I had intended to actually
post the data here, but it would not do so in any readable format):

Debt/GDP did not decrease continuously in the 60's and 70's. It jumped
around quite a bit. We started the 60's in surplus, and in the 60's and 70's
had several years when debt/GDP jumpted dramatically, and then dropped in
subsequent years. We were building up debt in the 60's and 70's, and thus
accumulating interest payments. The big jumps come in the '80's. Debt/GDP
ratios decrease throughout the '90's. Does this prove, as Janet asserts,
that there was no structural deficit in the 80's? We have to take two
factors into account. First, the tax increase of the early 90's under Bush,
and the deficit reduction package under Clinton. Even with growth and
declining unemployment, we did not hit a surplus until '97. Even now, a
significant portion of our surplus is from Social Security, not from the
general fund.

When I get a chance, I will review the CBO's projections more carefully to
attempt to verify or falsify a few generalities I have read. One problem
that i have heard is that there are several different forecasts from the
CBO, using various assumptions. The belief that we will have large
surpluses, of the amount claimed by both Bush and Clinton, is based, at
least, on the premise that we will continue to grow at our current rate.

Hopefully, I can get back to a few more substantive points on this issue
sometime tomorrow.







-----Original Message-----
From: sawicky@xxxxxxxxxx
To: POST-KEYNESIAN THOUGHT
Sent: 2/12/00 10:24 PM
Subject: RE: Debt reduction also creates fiscal space

[Clifford Poirot]
	Sorry. I should have been more specific. What I meant was that
the
Deficits of the 1980's, and to a lesser extent of the '60's and '70's
had
led to a large level of debt, and consequently, debt service. 13% of our
>>>>>>>>

Debt/GDP, and I presume interest/GDP, decreased continuously
from 1946 to 1979, so deficits of 60's and 70's created
absolutely no problem at all, let alone a 'large' level
of debt.

The '80's saw the increase in debt/GDP.

>>>>>>>>>>>
current total spending is on paying interest on the national debt, and
that
13% includes the Social Security portion of the budget. So out of the
general revenue part of the budget, roughly 30% is going to pay
*interest
alone* on the debt. Notably, this debt was accumulated due to the
structural
deficits of the 1980's and early 1990's. By eliminating the structural
>>>>>>>>

The past ten years shows these deficits were not
structural, since economic growth (not legislative
changes in spending or taxes) were responsible
for eliminating most of them.  Episodic would
be a better word.  Structural to me connotes
something built in that cannot be escaped
without deliberate action.

>>>>>>>>>>
deficit and beginning to pay down the debt, we allow the possibility for
lower interest rates and prudent leaning against the wind policy when we
need  it.
	I am extremely skeptical about the current budget projections.
One
>>>>>>>>>>

If you don't believe the projections, what is
the basis for your 'structural' deficit of the
future?  Such a deficit is purely the artifact
of projections.  Have you done projections?
How do yours differ from the official ones?

>>>>>>>
recent analysis I saw (the source was a Paul Krugman column) is that the
surplus projections only work if per person spending in real terms
actually
decreases over the period. Assuming we want to at leas maintain current
per
person spending levels in *real terms* we will have to increase nominal
expenditures by a considerable amount. This suggests that Bush's tax
proposals are nothing short of absolute recklessness, designed, to in
essence, wreck the welfare state and force large cuts in spending.
>>>>>>>>>>>>

PK has invented his own standard for gauging
spending growth.  The convention is current
law for entitlements, and constant real aggregate
for everything else (exc. interest).  I haven't
done the numbers (and I doubt PK has either),
but there is room for spending growth even
given the conventional projections.

If bush is out to wreck the welfare state, he's
going to have to get a lot more bold.  Fact is
the crusade for big tax cuts is over.  They are
not even flying in the Republican primaries.

mbs