As Stan Collender points out over at Capital Gains and Games, however, the absolute amount of the deficit is not the only thing that matters politically. Also important is how the deficit stacks up relative to expectations. And, as Stan says, there’s good reason to believe that the deficit will come in less than original forecasts.
Back in May, the Obama administration projected that this year’s deficit would come in at $1.84 trillion, assuming enactment of the President’s policies. In June, the Congressional Budget Office came up with a very similar estimate.
Now it’s looking as though the deficit could come in several hundred billion dollars lower than that.
At the TED conference in Oxford last month, Paul Romer put forward a big idea: charter cities. His basic vision is that the best way to promote growth in developing countries may be to start over. Of course, you can’t just sweep away the existing system of economic and political institutions; they may be killing growth, but they are well-entrenched. So do the next best thing: clear some ground and build new charter cities.
Those cities will have rules — indeed, economic history teaches that they must have rules — but they will be focused on providing an environment that promotes economic growth. In short, property rights and the rule of law are in, corruption and political patronage are out.
His provocative example: If the U.S. gives up on Guantanamo, Raul Castro should invite the Canadians to help manage the area as a charter city. Over time, perhaps Guantanamo could become the Hong Kong of the Caribbean.
To illustrate how prosperity varies around the globe, Romer uses the increasingly popular approach of showing night time satellite photos. North Korea is a sea of darkness next to South Korea, illustrating the perils of too much government control. The darkness of Haiti, as compared to its neighbor the Dominican Republic, similarly illustrates the perils of too little government or, at least, too little governance.
As Romer frames it, development is a classic Goldilocks problem of finding the right set of rules — not too hot, not too cold — and then allowing people to make the choices that eventually lead to prosperity.
The charts show how much banks have had to pay in interest on their senior, subordinated, and guaranteed debt, relative to the interest rates of comparable government bonds. For example, the chart shows that banks in the United Kingdom have recently had to pay about 250 basis points (i.e., 2.5 percentage points) more on their senior debt than the UK government pays on its debt.
There are many interesting stories spread across these charts. For example, the red lines suggest that the first wave of investors in guaranteed bank debt in the United States and France did well for themselves (since the decline in yields implies an increase in bond prices).
But the thing that really caught my eye was the behavior of the senior debt (green) and sub-debt (blue) lines. In the five European countries, you see what you might expect: the sub-debt trades at a higher spread than the senior debt. That makes sense, since the sub-debt faces greater risk of losses. Investors demand compensation — a higher yield — for bearing that risk.
Fittingly, the red lines represent the current fiscal year.
As you can see, corporate income taxes are lagging far behind the pace of recent years, as are non-withheld individual tax payments (those payments typically stem from capital gains, other investment income, and business income rather than regular wages and salaries).
Refunds have also increased (denoted by a larger negative figure — i.e., larger cash outflows). Refunds also spiked in the middle of last year due to the first economic stimulus.
The Treasury released its quarterly update on its borrowing needs yesterday. The headline is that Treasury expects to borrow $406 billion during July, August, and September. That’s a gigantic figure, but it is down from the roughly $530 billion that Treasury borrowed during those three months last year.
When combined with $1.4 trillion in borrowing during the previous nine months, the $406 billion will bring total borrowing to $1.8 trillion during this fiscal year (Oct. 2008 to Sept. 2009).
The Treasury release includes a number of fascinating charts about the size and composition of our nation’s debt. One that particularly caught my eye was this chart showing the percentage of outstanding debt that is scheduled to mature in the next 12, 24, or 36 months:
As you can see, Treasury has relied heavily on very short-term maturities to finance the recent burst of borrowing. Most notably, the fraction of debt that matures within 12 months (the blue line) reversed its decline and rose to levels not seen since the mid-1980s.
Students of financial crises, past and present, will recall that over-reliance on short-term debt is a classic precursor of financial distress. Think, for example, of the major financial firms that had to roll over significant fractions of their financing every week … or even every day.
I am happy to report that I will be a Visiting Professor at the Georgetown Public Policy Institute during the 2009-2010 academic year. It will be fun to return to the classroom after an eleven-year hiatus.
Given everything I’ve learned in the intervening years, I think I will teach economics quite differently. For example, I think it’s essential to include some insights from behavioral economics in my basic microeconomics course.
Suggestions welcome for fun examples, articles, blog postings, etc. that you think public policy students might enjoy in a micro course.
Note: I’ll provide a link once GPPI has time to add me to their web site. At the moment, linking over there would make it look like I am making this up.
One of my first posts cautioned against comparing the current economic downturn to the Great Depression. Our economy is certainly in terrible shape, as Friday’s GDP data confirmed. Indeed, it’s the worst downturn since World War II. But it still pales in comparison to the horror of the Great Depression.
Since we received fresh data on Friday, it seems like an auspicious time to present a new version of my chart making this point:
The green bar is the current recession. Most forecasters expect the economy to grow, albeit tepidly, in coming quarters. If they are right, the estimated peak-to-trough GDP decline in this downturn is 3.9%. (If you believe that forecasters are too rosy, feel free to add on your own estimate of further declines in the quarters ahead.)
You must be logged in to post a comment.