My Big Question = HUH?

HUH?

Sources: Moody’s Economy.com; Congressional Budget Office; Office of Management and Budget
Notes: U.S. Deficit measured in billions of dollars; GDP measured in 2007 U.S. dollars

I am the first to admit that I am not a political God or genius in any shape or form.  Sure I understand the Republican Elephant and Democrat Donkey (come on now, they didn’t make those political beanie babies for nothing!) and I follow their different thoughts and opinions, but beyond that things get hazy.  However, graduation from the bubble is only a year and a half away, and that means bills, taxes, jobs (hopefully), buying a house (or living at home…), etc.  This year I have made an effort to spend more time paying attention to the election process and trying to understand what is going on in the world around me.  Don’t get me wrong, I am far from becoming the next presidential candidate, let alone watching the news regularly, but it is all about the baby steps.

When asked what my biggest question about the current economic question was, I immediately went to the issue of money, especially since that seems to be everyone’s biggest concern.  After googling around and looking at different opinions I was left confused.  The first article I looked at discussed Obama’s plan to cut the federal budget deficit in half in four years.  The Congressional Budget Office is already forecasting a deficit for this year of $1.2 trillion, and Obama plans to halve four years worth of debt? Is this humanly possible? And where will this money come from?  President Obama believes that the “$787 billion economic stimulus package he signed last week” would “dramatically slash the skyrocketing annual budget deficit.” While I agree with President Obama in reducing the deficit that helped cause the current economic crisis, I am worried that all the spending he proposes will counteract it.

A second article that I had read earlier today from my dad made Obama’s four year plan so hard to believe.  This second particular article also talked about the deficit.  However, it discussed “President Obama plans to borrow about $7 trillion over the next ten years to finance all of his spending plans.”  Putting this into perspective, the article also included an interesting table that measured Projected U.S. Budget Deficit vs. Foreign GDP.  “The attached chart compares Obama’s projected deficit with the 2007 GDPs of the eleven largest economies on earth other than that of the U.S.”

So now we have Obama creating this spectacular plan to save our economy, while doling out an additional $7 trillion? Huh?  My biggest question about the economic crisis is simply, huh?  The controversy and discrepancy between articles, Obama’s proposals and intentions, the overall status of our economy, etc. are viewed and interpreted so widely that it is hard to get a good grasp on the concepts.  Money is thrown around left and right while the clock ticks and we must decide what to do.

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9 Responses

  1. Baby steps is all we can expect from anyone. It is better than the alternative.

    You identify a couple of questions.

    Very first, this is complicated stuff. At a minimum you have complicated economic ideas and models that are focused on moving targets 9what the government will spend and what its revenues will be). You have to add a political environment on top of that, and a news media that is either kind of ignorant of economics OR assume its audience is OR both. So, keep trying, but don’t get too frustrated.

    First, the government deficit is the difference in a given fiscal year between revenue and costs. Deficit accumulates over time into debt. Where does the money come from? Primarily in the form of US treasury bills, a form of public debt. So, the US government can fund its activities today, even if is running a deficit, if it issues debt. Kind of like how you can buy that nice outfit by using a credit card.

    Second, you can increase the deficit but decrease debt, as Obama says he wants to, because you increase spending now to stimulate economic growth which will lead to higher tax revenues down the line. This cuts projected debt. See? We already have huge debt, see. So, doing nothing, especially if the economy stays in recession, will increase the debt. So , if you lower the rate of growth, or even reverse it, you cut debt.

    Now, the one graph is a bit weird to me, honestly. What is the point of compering how much debt we issue over ten years to the annual size of a given economy?

    Yes it is big- 7 trillion dollars. But what are useful comparisons?

  2. Watching how the administration plans to balance its spending has definitely been an interesting area of analysis. Many of their actions have already backed the route that they are looking to take. Close to the beginning of her term, Hilary Clinton went to China to try and reassure the stability of US bonds (among other agendas). The hope is that countries with large cash flows, like China, will continue to buy US bonds to help fund our massive spending programs.

  3. Blaire, I have also recently been struggling with the same issue. The amount of money that the government is throwing around is unbelievable. I understand that it takes loans and financing to allow the banks to reorganize and also to help stimulate the economy, but where is it all coming from? The deficit is growing and growing, the economy isn’t turning around and the government is spending trillions in addition to its usual budget.

  4. What are the reasons we should be concerned about government debt? Of course, as an individual, or for organizations, bankruptcy is very traumatic and potentially spells the end of the entity. Is this this the same for the US government?

  5. I don’t think that the high debt that we have as a government would mean the same as if an organization files for bankruptcy. Yes, we have a huge amount of debt, but most countries also carry debt. I have always looked at it as “good” debt and “bad” debt, there are things that cause you, as an individual to accumulate debt, but are not necessarily bad things. You buy a home, you carry a mortgage which is good debt, it shows you have assets. You take loans out for school, to further your education, again not bad debt, you are investing in your future. The government also needs to carry some form of debt to show that they invest and care about the future of our economy. We lend to foreign countries to create better relations. That is good debt in my mind. The amount of debt that we have now is scary, and it will always be scary, but I think if you look at what is bad with our debt and what is good, we are still doing good things. The bad has just taken over tremendously recently and is what we need to focus on.

  6. […] on No One Raindrop thinks it Caus…Megan on Federal Reserve – Indepen…Kristen on My Big Question = HUH?Kristen on “Hey Big Spender! Spend …Kristen on Freddie Mac […]

  7. Bad debt and good debt is a useful distinction. These debts are also investments. The quetsion, like you say, is what are we getting for them.

    We can go into debt as a country to pay for current needs (like military and medicare, to name two biggest programs). These are not necessarily investments with pay offs. It is like we are taking on debt (future obligation to pay) to avoiide raising taxes (paying) now. You can argue that this is asking your grandchildren to pay for your grandparents’ health care (with interest!) so you can buy a plasma TV.

    Expanding education, building the Internet, highways, and other kinds of debt now can lead to more economic growth, more tax revenue, and hence pay for themselves.

  8. Jordi, you said:

    “Second, you can increase the deficit but decrease debt, as Obama says he wants to, because you increase spending now to stimulate economic growth which will lead to higher tax revenues down the line.”

    Okay, makes sense… increase the deficit now, but will enough economic growth really occur so that the deficit won’t turn into debt? It seems like Obama is trying to increase the deficit by such large amounts that it will be nearly impossible for at least a large chunk of this to not turn into debt. And this of course will effect my generation as we will be the ones still suffering as we look for jobs and try to at least start a productive life.

    Kristen, you also made a good point about bad vs. good debt. However, building up assets through loans and debt is one thing, but the government debt is a whole different story. They clearly are the definition of bad debt. Whatever they spend today is just pushed on to another generation to try and cover up for.

    Thanks for the comments, it helps understand more of what is going on.

  9. Blaire-

    Any defecit for this year is tomorrow’s debt. My point and Kristen’s are pretty similar. The question is what do you get for that money? Will it be purchases that lead to higher growth so you can pay off that debt?

    You are absolutely right that it gets passed off.

    The US government has run deficits since the 1930s, with the exception of a couple of years at the end of Clinton beginning of Bush.

    Whether what Obama and Congress have done is too much, just right, or not enough is an open question. But maybe we can use the blog to get a handle on how we would know.

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