Think before gloating over Bush's spectacular fiscal incompetence

[chequita guevara]

Can the US refinance its debt?

[el freako]

Originally posted by DanS
A couple of things to note.
Federal tax receipts as a share of the economy were getting out of hand (outside the post-WWII pattern) and it was time to draw the receipts down.

Agreed, the 35% of GDP that the government recieved in income was significantly above the 30% to 32% range it has run in since the late 1960's, however the Bush years have also mostly reversed the cut's in the share of GDP that the government was spending as well so the fiscal situation of the Reagan years is being revisited.

Originally posted by DanS
(2) Large deficits are scary, but if there is ever a time for large deficits, it is during a period similar to the one we have now, where interest rates are low and we're climbing out of a recession.

True, but the deterioration in your structural deficit is very large (in the order of 4% of GDP), at some point during your recovery either taxes will have to rise significantly or spending will have to fall sharply.

Originally posted by DanS
(3) The current federal fiscal situation is entirely manageable and our current burn rate and plans for Iraq have almost no possibility of impacting it long term. Iraq is not a recurring expense. Eventually, we will be out of there.

Not unless you do something to correct the structural problems you won't - the US's structural deficit is 4%, which means that you need nominal GDP growth of 8.5% just to stop your debt/gdp burden from rising - I don't think this is achieveable without a major rise in inflation.

Originally posted by DanS
(4) The US trade deficit is large, but it's primarily that way because some other countries want it that way. Once that attitude changes, the dollar will fall further, our manufacturers will get a respite, and the gap will close in the long run. Nothing to worry about, unless this change is especially sudden.

But there will either be pain as US households have to cut back sharply on consumption in order to release more funds for investment or investment itself will suffer with dire consequences for the long-term health of your economy.

[DanS]

however the Bush years have also mostly reversed the cut's in the share of GDP that the government was spending as well so the fiscal situation of the Reagan years is being revisited

Well, the Reagan years were different in many respects, even though the numbers are similar (well, not quite, yet). We aren't coming out of a decade of stagflation, for one. We also managed to have a surplus for a couple of years, so this gives us a little slack on the other side, as long as it is temporary. Also, interest rates were a lot higher then versus now. Lastly, Reagan's military spending was recurring, while Bush's won't be. Even the hawks are talking about military spending in the relatively modest 3.5% of the economy range.

True, but the deterioration in your structural deficit is very large (in the order of 4% of GDP), at some point during your recovery either taxes will have to rise significantly or spending will have to fall sharply.

Over time, this structural deficit will shrink. The US suffers from income tax bracket creep. If Bush doesn't cut taxes again, then taxes will naturally gradually rise over time, as happened during the Clinton years. On the spending side, it doesn't take much discipline to keep spending increases a percent or whatever below nominal economic growth.

Of course, you can make the argument that Bush and the congress don't even have the discipline to keep spending in check.

But there will either be pain as US households have to cut back sharply on consumption in order to release more funds for investment or investment itself will suffer with dire consequences for the long-term health of your economy.

This can be done gradually. It need not be a crash course.