A Little Table (or two) Showing Why We’re Neither Greece Nor in Need of Default

January 6th, 2013 at 1:34 pm

(Updated with added table!)

I promised myself (and my readers) that I’d take a break from fiscal policy and focus on the real economy for a while—very important not to get sidetracked into every morsel of crazy being doled out down here in DC.

But given some arguments I’ve been having with those insisting we’re Greece or worse, once more into the breach with a very simple set of numbers.

The table below is based mostly on the numbers I wrote about here, thinking about what more it would take given the spending cuts and tax increases legislated thus far to stabilize the debt/GDP ratio over the next ten years (I humbly submit that my CBPP colleagues have done the best work on this).

The first row shows the $1.5 trillion of enacted spending cuts when the 2011 BCA lowered spending caps on the discretionary side of the budget (none of these figures include interest savings) and the $600 billion in new tax increases from the fiscal deal just passed.  The second row takes the $1.2 trillion needed to stabilize the debt over the ten year budget window as described here.  As you can see, in my never-ending quest for the balance the Buddha taught us to seek, I’ve divided them equally between spending cuts and tax increases.

Here’s what I take from this little-bitty table:

–The grand $3.3 trillion total plus interest savings would be ample to stabilize the debt/GDP ratio over the next ten years.

–$1.2 trillion is not nothing, but over 10 years, it’s 0.6% of GDP, and in a rational political system, it would not be a heavy lift to find the $600 billion from each side of the ledger (see table below for the same numbers as shares of GDP).

–Given the split I’ve made for the outstanding $1.2 trillion, the ratio of spending cuts to tax increases is 1.75; however, if the R’s have their way and the whole $1.2t comes from the spending side, that ratio will be 4.5 spending cuts to tax increases, a highly imbalanced outcome.

So, the next time some wild-eyed hyper-ventilator explains why they need to threaten default on our national debt to have their way on spending cuts, or claims that unless we scrap the entitlements, we’ll sink into the sea, please show them these little calculations.  It may not work, but at least it might quiet them down for a moment.

[Here’s the same table as shares of GDP over the next decade:



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13 comments in reply to "A Little Table (or two) Showing Why We’re Neither Greece Nor in Need of Default"

  1. tarheeldad says:

    Heard you on NPR having to be polite to that idiolog from the CATO Insitute. He claimed that Canada cut ALL Goverment expendititures by 10% and all went well. Very hard to believe–must have been some special situation, or falsehood. Can you discuss this Libertarian talking point?


    • John T says:

      Don’t know where Cato get their numbers. According to the Canadian Government’s own numbers in fiscal year 2010-2011 expenditures were $270.5 billion with revenues of $237.1 billion. In fiscal year 2011-2012 expenditures were $271.4 billion and revenues were $245.2 billion. They are aiming for a balanced budget by 2016. These are numbers for the federal government only.

  2. Ben says:

    How does growth fit in to that 1.2 trillion needed? Since lower unemployment will lead to higher tax revenues and lower spending on temporary assistance programs. Is that already factored in to your calculations?

  3. urban legend says:

    Where does growth generating higher tax revenue figure into all this? Or reduced growth from reduced spending generating lower revenue? Doesn’t it deserve a more prominent place than a brief aside? And wouldn’t even modest improvements in growth rates over assumptions simply blow away all these numbers that are stated with so much apparent certainty and with no disclosure of the assumptions made or the basis for those assumptions? It sounds like the declarations that Social Security “will” lose the Trust Fund surplus in 2033 (or whatever) based on 20+-year assumptions. In 1997, nobody but nobody expected the Trust Fund exhaustion date to move from 2029 to 2042 by 2003. Nobody should ever be saying that anything “will” happen 20 years from now.

  4. R. Nemo says:

    Scream in a pillow! I like that. Clearly there is no factual fiscal crisis.

    Sadly what we are watching is not about deficits or solutions or reason and facts. It is a class war against the New Deal and the Welfare state. The default is just a means to an end: killing entitlements. I don’t think the tea party even knows why it thinks what it thinks. It is by definition IRRATIONAL. Their hated of “big government” isn’t based on anything. It’s just a feeling; a notion… An obsession.

    Kudos to you Jared. Great fact finding!

    • tarheeldad says:

      To satisfy my curiosity I believe I found the Cato Paper describing the Canadian miracle of 20 years ago when Canadian GD (1990) was a mere $669.5 c.


      Without wasting too many brain cells, I suspect if the percent of GDP the U.S spends on defense (in and off budget) was even twice the Canadian expenditure, we would not be having this discussion.


  5. R Hess says:

    FYI, here’s a small short-term take on the Debt/GDP issue, at least in rough terms (Source: Treasury MTS, smoothed). Bottom line: Debt/GDP is likely to stop rising quite soon, for a while at least.

    Monthly total outlays have stuck near $300b for a couple of years. This reflects, in part, the current series of continuing resolutions. Monthly receipts now stand at about $215b and have increased at about $1.35b monthly over the past year. Rising nominal GDP at 5% gives us about $65b per month in additional debt “room” without increasing the Debt/GDP ratio. So, right now, we’re within about $20b per month of a stabilized ratio.

    Removing the payroll tax holiday will increase the receipts slope by about $4b per month. At flat outlays and receipts rising at $5b to $6b monthly, the ratio should plateau in 4 months or so, if my estimates are correct.

  6. mitakeet says:

    Why, oh why does the subject of cutting the military budget never seem to come up? Why the eternal focus on forcing little old ladies to eat dog food as they lie in bed waiting for nature to heal their broken hip? If we cut our military budget in half (granted, doing so immediately would no doubt trigger a massive depression), from a protect-our-asses point of view we have lost nothing (indeed, I think it fair to argue that by cutting idiot weapons program the Pentagon actually hates we would wind up with a _better_ military). That is $350 billion a year, or, now that we do everything for 10 years at a stretch (why that magical number? Why not 20 or 50 or even 100?), $3.5 trillion. Surely that, and that alone, would reverse our financial situation.

    Why is that conversation so completely out of the question? Have we so totally become Roman that we can’t alter their trajectory into disintegration?

  7. tarheeldad says:

    Defence budget=Republican stelth stimulus.
    No need to thank me.


  8. Red says:

    Just so I’m understanding properly, when you say ‘stabilize the debt/GDP ratio’ you don’t actually mean a balanced budget (i.e. zero budget deficit and zero growth in the national debt), correct?

    Stabilization means that the debt is not growing any faster than GDP. Not that it isn’t growing (or even shrinking).