Deficit Reduction and Economic Growth: Are They Mutually Exclusive Goals? Tuesday, May 1, 2012; 2:30 PM - 3:45 PM

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1 Deficit Reduction and Economic Growth: Are They Mutually Exclusive Goals? Tuesday, May 1, 2012; 2:30 PM - 3:45 PM Moderator: Gillian Tett, U.S. Managing Editor, Financial Times Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; former Chief Economist to Vice President Joe Biden Douglas Holtz-Eakin, President, American Action Forum; former Director, Congressional Budget Office; former Chief Economist, Council of Economic Advisors Edward Lazear, Professor, Stanford University; Senior Fellow, Hoover Institution; former Chairman, Council of Economic Advisors Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury 1

2 Jared Bernstein s slides 2

3 3

4 Saez et al: Lowering top marginal tax rate associates with greater ineq, not faster growth Source: Piketty, Saez, Stantcheva,

5 Source: OMB 5

6 6

7 7

8 Edward Lazear s slides 8

9 1947q1 1948q4 1950q3 1952q2 1954q1 1955q4 1957q3 1959q2 1961q1 1962q4 1964q3 1966q2 1968q1 1969q4 1971q3 1973q2 1975q1 1976q4 1978q3 1980q2 1982q1 1983q4 1985q3 1987q2 1989q1 1990q4 1992q3 1994q2 1996q1 1997q4 1999q3 2001q2 2003q1 2004q4 2006q3 2008q2 2010q1 GDP trend in the United States Log of Real GDP Source: Bureau of Economic Analysis. 9

10 The recent trend 10

11 The effect of the stimulus 11

12 The US debt 12

13 Steven Rattner s slides 13

14 Federal revenues vs. spending (% of GDP) 24.1% 21.0% 18.0% 15.4% Source: CBO 14

15 Federal spending on infrastructure and R&D (% of GDP) 0.89% 0.23% Source: BEA, National Patterns of R&D Resources 15

16 Additional slides 16

17 U.S. debt and deficits Historical perspective % GDP War of 1812 Federal public debt Federal surplus/deficit Spanish American War ( ) Mexican American War ( ) U.S. federal deficits and debt to 2010 Civil War ( ) Great Depression (1929-late 1930s) World War I ( ) U.S. federal income tax introduced (1913) World War II ( ) Korean War ( ) Great Recession ( ) Vietnam War ( ) Source: Milken Institute. 17

18 U.S. government spending, revenue and deficits Historical perspective % GDP Surplus/Deficit Revenue U.S. federal government spending and revenue to 2010 Spanish American War ( ) Spending Civil War Mexican ( ) War of 1812 American War ( ) World War II ( ) Great Depression (1929-late 1930s) World War I U.S. federal income tax introduced (1913) Korean War ( ) Vietnam War ( ) Great Recession ( ) Source: Milken Institute

19 Deficit is projected to decline remarkably under the baseline scenario % GDP 3 1 Actual Projected CBO's baseline projection Alternative fiscal scenario Source: U.S. Congressional Budget Office. 19

20 Deficit projected under CBO s baseline and alternative fiscal scenario % GDP Baseline Extend Tax Policies Prevent Spending Cuts Additional Debt Service Source: U.S. Congressional Budget Office. 20

21 U.S. budget deficits/surpluses % GDP 4 CBO versus Administration projections 2 0 CBO's baseline projection Administration's projection Sources: U.S. Congressional Budget Office, Office of Management and Budget, White House. 21

22 Federal debt held by the public rises to the WWII level under alternative fiscal scenario % GDP World War II ( ) Alternative fiscal scenario 60 CBO's baseline projection Source: U.S. Congressional Budget Office. 22

23 U.S. gross public debt is roughly equal national income % GDP Gross Federal debt Federal debt held by public Source: White House. 23

24 Federal outlays by major category Net interest 5.9% Federal outlays: US$3.8 trillion (2012) Other 17.1% Defense 18.9% Social security 20.5% Health and medicare 22.3% Source: Department of the Treasury and Office of Management and Budget. Income security 15.3% 24

25 Federal revenues by major category Other revenue sources 9.2% Federal revenues: US$2.5 trillion (2012) Social insurance (payroll) taxes 34.1% Individual income taxes 47.2% Corporation income taxes 9.6% Source: Department of the Treasury and Office of Management and Budget. 25

26 Federal revenues by category Actual and projection % GDP Individual income taxes Projection 8 6 Social insurance (payroll) taxes 4 2 Other revenue sources Corporate income taxes Source: U.S. Congressional Budget Office. 26

27 U.S. labor market conditions are improving Thousands of workers Total nonfarm employment (one-month net change, seasonally adjusted) Source. Bureau of Labor Statistics. 27

28 Unemployment rate remains high % Civilian unemployment rate (%) 10.8% during the recession 10.1% in October, % in March, Source. Bureau of Labor Statistics. 28

29 Weak recovery compared with previous recoveries % Percent change in total nonfarm employment from the start of recession Months after the start of recession Sources: U.S. Bureau of Labor Statistics, Milken Institute. 29

30 Weak economic recovery? Compared with previous recoveries Periods of Recession Average real GDP growth rates (%) in the four quarters following each recession % % % 2.6% 7.8% Real GDP grew 10.9% in 1934, the year after the Great Depression ended % Source: Bureau of Economic Analysis, U.S. Department of Commerce, Milken Institute. 30

31 U.S. households still carry too much debt, but continue deleveraging % 150 U.S. household debt (% of disposable personal income) Source: Federal Reserve. 31

32 Ownership of U.S. Treasury securities % of gross Treasury debt Total gross federal debt: US$15.5 trillion (February 2012) Oil exporters 1.7% Brazil 1.5% Other foreign 15.1% Intra-U.S. government 30.8% Japan 7.1% China 7.6% Source: Treasury Department. United States 36.3% 32

33 Ownership of publicly held U.S. debt Total federal debt held by the public = US$10.7 trillion (February 2012) Oil exporters 2.5% Other foreign 21.8% Brazil 2.1% United States 52.4% Japan 10.2% China 11.0% Source: Treasury Department. 33

34 U.S. economy expands at a slow rate % Real GDP growth (%) (Quarterly percentage change, seasonally adjusted at an annual rate) Consensus forecast Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Q2 Q3 Q4 Q Source: Bureau of Economic Analysis, U.S. Department of Commerce. 34

35 Annual inflation has declined, but core inflation continued to rise Annual rate (%) 6 Consumer Price Index (CPI), total 3 0 CPI, excluding food and energy Source: Federal Reserve Bank of St. Louis. 35

36 U.S. Treasury yields remained low by historical standards Percent 6 Interest rates on U.S. Treasury securities year year Source: Federal Reserve. 36

37 Real interest rate is near zero; negative in some periods % Real 10-Year Treasury yield Sources: Federal Reserve, Federal Reserve Bank of St. Louis. 37

38 U.S. economic indicator watch (F) Real GDP growth (%) Inflation (%) Unemployment (%) Budget balance (% GDP) Federal funds rate (%) year Treasury yield (%) Source: Bloomberg. 38

39 High public debt-to-gdp ratios in many advanced countries Gross public debt (% of GDP) Advanced economies Emerging markets Source: Bloomberg. 39

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