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Staggering Budget Gap And A Reluctance To Fill It

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http://www.nytimes.com/2009/07/08/business...ml?ref=business

No one argues that the staggering deficits run up by the American government in a bid to rescue the economy are desirable, healthy or even sustainable — not if the national debt continues to swell at its current pace. But considerable debate centers on when and how vigorously to start easing off Washington’s borrowing habit, with substantial risks at both extremes.

Pull back on government spending now, the argument runs, and condemn an already hobbled American economy to years of mass joblessness and anguish. Indeed, some economists are already arguing that with unemployment near double digits, the government must consider giving another dose of stimulus spending now, despite the fact that this will add to the deficit.

Keep spending with abandon, goes the counterargument, and invite the possibility of a debt crisis with spiking interest rates, crippling inflation and a plunging dollar.

Those arguing for tighter federal spending to contain the budget deficit contend the nation has already borrowed so much money that the people who have lent it may get spooked and abruptly refuse to supply more.

China’s central bank and other foreign creditors might curb their purchases of American government savings bonds, which finance so much national spending. That would force the Treasury to pay higher interest rates to attract other buyers of its debt, lifting interest rates throughout the American economy.

And that would increase the costs of borrowing for companies and ordinary families alike in the midst of economic weakness, like a wet blanket thrown on an already weak fire.

“We are not an island,†said Martin N. Baily, chairman of the Council of Economic Advisers under President Bill Clinton and now a fellow at the Brookings Institution. “We are part of the global economy, and there are concerns out there among those who have been buying our debts that we owe too much.â€

But others argue that now is precisely the wrong time to worry about the deficit. Yes, the risks of growing indebtedness are real and unpalatable, but there are no appetizing options on the menu — not at a time of 9.5 percent unemployment. In this view, debt must take a back seat to the imperative to spend money and stimulate the economy to create jobs.

In this view, pulling back now in the interest of limiting the deficit would be akin to withholding pharmaceuticals from a patient stricken with a potentially fatal disease because the treatment might itself leave long-term damage.

The deficit has grown in part because of the $787 billion spending package championed by the Obama administration to aid states, generate jobs and increase benefits for the jobless. But these expenditures landed atop huge deficits run up by the Bush administration, which had cut taxes and prosecuted an expensive war in Iraq.

If policy now tilts too far toward deficit cutting, some argue, that would treat job creation as an option the nation somehow cannot afford, in contrast to “must haves†like tax cuts for wealthy Americans and unpopular foreign military entanglements.

“We certainly have to tolerate the deficits we have now,†said Lawrence Mishel, president of the labor-oriented Economic Policy Institute. “Any effort to cut them now would be foolhardy and cruel. This concern about the deficit in effect says to the American people, ‘tough luck.’ â€

On one point alone, no debate is required: The United States already owes staggering sums of money and will soon owe more.

The Congressional Budget Office projects federal spending will exceed revenues by $1.7 trillion this year, or about 12 percent of the nation’s annual economic output — the largest deficit since World War II.

“The budget outlook at every horizon is troubling,†declared Alan J. Auerbach, a finance expert at the University of California, Berkeley, and William G. Gale, an economist at the Brookings Institution, in a recent paper. “The fiscal year 2009 budget is enormous; the 10-year projection is clearly unsustainable; and the long-term outlook is dire and increasingly urgent.â€

The budget office estimates that federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010. Merely paying the interest on this year’s debt will cost taxpayers $565 billion, or 4 percent of the nation’s annual economic output.

“The magnitudes are very worrisome,†said John B. Taylor, a former member of the Council of Economic Advisers under the elder President Bush and now a professor at Stanford.

Like his fellow deficit hawks, Mr. Taylor is particularly concerned about inflation. Absent sustained and robust economic growth, the only way for the United States to pay down its debt is to cut spending or raise taxes — both politically difficult. That may tempt the government to take a seemingly easier course: print money to pay the bills.

Creating money out of thin air tends to increase prices, raising the possibility of the return to the sort of inflation that crippled the economy in the 1970s.

“I’m absolutely worried about inflation,†Mr. Taylor said.

Page 2 at the link.

The US is in trouble, spending 4% of a nations annual income on interest payments is stupid. Money down the drain and this is a figure that can't be cut easily. You can sack workers, you can cut costs, but cutting interest repayments isn't that easy.

Even more worrying if your economy contracts this percentage figure gets even bigger which is why growth is so important to govt and consumers. But the economy is like pair of lungs they expand and contract.

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http://www.nytimes.com/2009/07/08/business...ml?ref=business

Page 2 at the link.

The US is in trouble, spending 4% of a nations annual income on interest payments is stupid. Money down the drain and this is a figure that can't be cut easily. You can sack workers, you can cut costs, but cutting interest repayments isn't that easy.

Even more worrying if your economy contracts this percentage figure gets even bigger which is why growth is so important to govt and consumers. But the economy is like pair of lungs they expand and contract.

Hope Gordan is reading this!! :blink:

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http://www.nytimes.com/2009/07/08/business...ml?ref=business

Page 2 at the link.

The US is in trouble, spending 4% of a nations annual income on interest payments is stupid. Money down the drain and this is a figure that can't be cut easily. You can sack workers, you can cut costs, but cutting interest repayments isn't that easy.

Even more worrying if your economy contracts this percentage figure gets even bigger which is why growth is so important to govt and consumers. But the economy is like pair of lungs they expand and contract.

i dunno......

4% doesn't sound like a lot.

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“We certainly have to tolerate the deficits we have now,â€

:blink:

How is that done? -- Just a change of attitude? -- Did he really mean "suffer"? -- Then damn well say it!

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