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
Jared Bernstein s slides 2
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Saez et al: Lowering top marginal tax rate associates with greater ineq, not faster growth Source: Piketty, Saez, Stantcheva, 2011 4
Source: OMB 5
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Edward Lazear s slides 8
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 1947-2011 4.2 Log of Real GDP 4.1 4 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 Source: Bureau of Economic Analysis. 9
The recent trend 10
The effect of the stimulus 11
The US debt 12
Steven Rattner s slides 13
Federal revenues vs. spending (% of GDP) 24.1% 21.0% 18.0% 15.4% Source: CBO 14
Federal spending on infrastructure and R&D (% of GDP) 0.89% 0.23% Source: BEA, National Patterns of R&D Resources 15
Additional slides 16
U.S. debt and deficits Historical perspective % GDP 140 120 100 80 60 40 20 0 War of 1812 Federal public debt Federal surplus/deficit Spanish American War (1898-1899) Mexican American War (1847-1848) U.S. federal deficits and debt - 1790 to 2010 Civil War (1861-1865) Great Depression (1929-late 1930s) World War I (1914-1918) U.S. federal income tax introduced (1913) World War II (1939-1945) Korean War (1950-1953) Great Recession (2007-2009) Vietnam War (1961-1975) -20-40 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 Source: Milken Institute. 17
U.S. government spending, revenue and deficits Historical perspective % GDP 50 40 30 20 10 0-10 -20-30 Surplus/Deficit Revenue U.S. federal government spending and revenue - 1790 to 2010 Spanish American War (1898-1899) Spending Civil War Mexican (1861-1865) War of 1812 American War (1847-1848) World War II (1939-1945) Great Depression (1929-late 1930s) World War I U.S. federal income tax introduced (1913) Korean War (1950-1953) Vietnam War (1961-1975) Great Recession (2007-2009) Source: Milken Institute. -40 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 18
Deficit is projected to decline remarkably under the baseline scenario % GDP 3 1 Actual Projected -1-3 -5-7 -9 CBO's baseline projection Alternative fiscal scenario -11 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: U.S. Congressional Budget Office. 19
Deficit projected under CBO s baseline and alternative fiscal scenario % GDP 0-1 -2-3 -4-5 -6-7 Baseline Extend Tax Policies Prevent Spending Cuts Additional Debt Service -8 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: U.S. Congressional Budget Office. 20
U.S. budget deficits/surpluses % GDP 4 CBO versus Administration projections 2 0 CBO's baseline projection -2-4 -6-8 Administration's projection -10-12 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Sources: U.S. Congressional Budget Office, Office of Management and Budget, White House. 21
Federal debt held by the public rises to the WWII level under alternative fiscal scenario % GDP 120 100 80 World War II (1936-1945) Alternative fiscal scenario 60 CBO's baseline projection 40 20 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: U.S. Congressional Budget Office. 22
U.S. gross public debt is roughly equal national income % GDP 120 100 80 Gross Federal debt 60 40 20 Federal debt held by public 0 1961 1966 1971 1976 1980 1985 1990 1995 2000 2005 2010 2015 Source: White House. 23
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
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
Federal revenues by category Actual and projection % GDP 12 10 Individual income taxes Projection 8 6 Social insurance (payroll) taxes 4 2 Other revenue sources Corporate income taxes 0 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 Source: U.S. Congressional Budget Office. 26
U.S. labor market conditions are improving Thousands of workers 600 400 200 0-200 -400-600 -800 Total nonfarm employment (one-month net change, seasonally adjusted) -1000 2007 2008 2009 2010 2011 2012 Source. Bureau of Labor Statistics. 27
Unemployment rate remains high % 12 10 8 Civilian unemployment rate (%) 10.8% during the 1981-1982 recession 10.1% in October, 2009 8.2% in March, 2012 6 4 2 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Source. Bureau of Labor Statistics. 28
Weak recovery compared with previous recoveries % 10 8 6 4 2 0-2 -4-6 -8 Percent change in total nonfarm employment from the start of recession 2007-09 1990-91 2001 1973-75 1981-82 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Months after the start of recession Sources: U.S. Bureau of Labor Statistics, Milken Institute. 29
Weak economic recovery? Compared with previous recoveries Periods of Recession Average real GDP growth rates (%) in the four quarters following each recession 1929-1933 10.9% 1973-1975 6.2% 1981-1982 1990-1991 2001 1.9% 2.6% 7.8% Real GDP grew 10.9% in 1934, the year after the Great Depression ended. 2007-2009 3.3 % Source: Bureau of Economic Analysis, U.S. Department of Commerce, Milken Institute. 30
U.S. households still carry too much debt, but continue deleveraging % 150 U.S. household debt (% of disposable personal income) 100 50 0 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Source: Federal Reserve. 31
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
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
U.S. economy expands at a slow rate % 6 4 2 0-2 -4-0.7 Real GDP growth (%) (Quarterly percentage change, seasonally adjusted at an annual rate) 1.7 3.8 3.9 3.8 2.5 2.3 0.4 1.3 1.8 3.0 2.2 2.2 2.5 2.5 2.15 Consensus forecast -6-8 -6.7 Q1 2009 Q2 Q3 Q4 Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3 Q4 Q1 2013 Source: Bureau of Economic Analysis, U.S. Department of Commerce. 34
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 -3 2005 2006 2007 2008 2009 2010 2011 2012 Source: Federal Reserve Bank of St. Louis. 35
U.S. Treasury yields remained low by historical standards Percent 6 Interest rates on U.S. Treasury securities 5 4 10-year 3 2 2-year 1 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: Federal Reserve. 36
Real interest rate is near zero; negative in some periods % Real 10-Year Treasury yield 12 10 8 6 4 2 0-2 -4 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: Federal Reserve, Federal Reserve Bank of St. Louis. 37
U.S. economic indicator watch 2011 2012(F) Real GDP growth (%) 1.70 2.30 Inflation (%) 3.17 2.40 Unemployment (%) 9.00 8.20 Budget balance (% GDP) -8.20-7.20 Federal funds rate (%) 0.25 0.25 10-year Treasury yield (%) 1.88 2.57 Source: Bloomberg. 38
High public debt-to-gdp ratios in many advanced countries Gross public debt (% of GDP) 250 230 200 150 100 50 0 10 Advanced economies Emerging markets 66 68 44 26 82 99 99 107 103 105 120 161 Source: Bloomberg. 39