Deficits, Debt, and the Fiscal Cliff
Kevin Christ
Associate Professor of Economics
Tuesday, September 25, 2012
National Debt, 1980 to 2012
Gross Debt
1980
1988
1992
2000
2008
2012
Amount
Growth
909
2,601
186%
4,002
54%
5,629
41%
9,986
77%
16,351
64%
Billions.
All dollar amounts are in billions.
Debt Held by Public
Amount
Growth
712
2,052
188%
3,000
46%
3,410
14%
5,803
70%
11,578
100%
Nominal
GDP
2,724
5,009
6,242
9,821
14,334
15,602
Debt Held
Gross Debt
by Public
as a % of
as a % of
Nominal GDP Nominal GDP
33%
26%
52%
41%
64%
48%
57%
35%
70%
40%
105%
74%
National Debt Held by Public, 1980 to 2012
18,000
16,000
14,000
Billions $
12,000
10,000
8,000
6,000
4,000
2,000
0
National Debt Held by Public (red) and GDP (black)
18,000
16,000
14,000
Billions $
12,000
10,000
8,000
6,000
4,000
2,000
0
National Debt as a % of GDP
100%
90%
80%
?
70%
60%
50%
40%
30%
20%
10%
0%
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
National Debt Held by Public / Nominal GDP (Assumes 2.5% Growth Rate of NGDP for 2013 – 2020).
2012
2016
2020
Federal Outlays (Red) and Revenues (Black) as a % of GDP
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Federal Outlays (Red) and Revenues (Black) as a % of GDP
With Projections from Obama’s 2012 Budget
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Federal Outlays (Red) and Revenues (Black) as a % of GDP
With Projections from Obama’s 2012 Budget (dotted lines) and Ryan’s Budget Plan (grey lines)
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
National Debt as a % of GDP
With Projections from Obama’s 2012 Budget (dotted lines) and Ryan’s Budget Plan (grey lines)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
National Debt Held by Public / Nominal GDP (Assumes 5.7% Growth Rate of NGDP for 2013 – 2020).
2012
2016
2020
National Debt as a % of GDP
With Projections from Obama’s 2012 Budget (dotted lines) and Ryan’s Budget Plan (grey lines)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
National Debt Held by Public / Nominal GDP (Assumes 2.5% Growth Rate of NGDP for 2013 – 2020).
2012
2016
2020
What’s this I hear about a fiscal cliff?
 Shorthand for a group of policy changes that will
come together around Jan. 1 – expiration of
Bush-era tax cuts, automatic spending cuts of
$109 billion (“Sequestration”), alternative
minimum tax starts kicking in …
 Conventional wisdom assumes that Congress will
do something constructive in a lame-duck session.
 Given how many things may go wrong during
November and December, a Goldman Sachs
research note gives a 1 in 3 chance that Congress
will fail to pass even short-term measures to
avoid a cliff.
In terms of
how our debt
evolves as a
percentage of
GDP, avoiding
the cliff might
be crucial – do
we get back to
5% or 6%
growth,
remain in the
2% to 3%
doldrums, or
worse?
The Long Road Back (From a “Balance Sheet” Recession)
 We’re experiencing a very slow recovery from a “balance sheet recession”
 Richard Koo (2011), “The world in balance sheet recession: causes, cure, and politics.” RealWorld Economics Review 58, http://www.paecon.net/PAEReview/issue58/Koo58.pdf
 Martin Wolf (2012), “Getting out of debt by adding debt.” July 25, 2012,
http://blogs.ft.com/martin-wolf-exchange/2012/07/25/getting-out-of-debt-by-addingdebt/#axzz27Ps9eoHx
 The “fiscal cliff” would amount to a shift to austerity – but having the public sector
deleverage while the private sector continue its deleveraging process could be
detrimental to economic performance.
 Congressional Budget Office (2012), “Economic effects of reducing the fiscal restraint that is
scheduled to occur in 2013.”
http://www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint_0.pdf
 “… in a depressed economy like the present, if a long deep recession casts even a small
shadow on future potential output, with interest rates in the range at which the U.S.
has been able to borrow, there is a substantial likelihood that expansionary fiscal policy
right now would be self-financing, and an overwhelming likelihood that it would pass a
benefit-cost test.
 Brad DeLong and Larry Summers, “Fiscal Policy in a Depressed Economy”, Brookings Papers,
March 22, 2012.
http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2012_spring_bpea_papers/2012
_spring_BPEA_delongsummers.pdf