Lower Deficits and Bad Data

 

 

 

May 10, 2013
 

 

America's budget deficit is ballooning out of control, right?

 

As it happens, while Congress and certain pundits scream that we need to cut government spending, analysts are discovering something surprising: the U.S. government budget deficit this year and next appears to be shrinking. The Wall Street firm Goldman Sachs has issued a report which lowered fiscal 2013's estimated red ink from $900 billion to $775 billion, or about 4.8% of total U.S. economic output.

 

 

How did this happen? Spending is down as a result of the sequestration ($85 billion this year) and prior spending cuts, plus tax revenues are up 12% over last year, the report tells us. It says that the deficit may come in even smaller than currently anticipated, due to the higher payroll taxes that are only now starting to be counted on the government's balance sheet. If the economy grows faster than expected, that, too, could bring in higher-than-anticipated revenues. Goldman now projects the budget deficit to fall to just 2.7% of economic output by the 2015 fiscal year, which many economists believe is a sustainable level.

 

 

Interestingly, some global economists are not happy about this optimistic budget news. Senior members of the International Monetary Fund are criticizing Washington policymakers for imposing too much budget austerity, too soon, arguing that it is preventing the unemployment rate from coming down more quickly.

 

 

Meanwhile, one of the most influential arguments for bringing the overall deficit down before it reaches 90% of American GDP has taken a serious hit to its credibility. In an astonishing development, three professors from the University of Massachusetts have looked over spreadsheet data behind a highly influential book published by professors Carmen Reinhart and Ken Rogoff, which purports to show that throughout history, nations have typically foundered when their debt level reached certain thresholds. The UMass professors found that in their calculations, Reinhart and Rogoff inadvertently omitted data for three countries: Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). An embarrassing coding error in the spreadsheet also excluded other data from five countries: Australia, Austria, Belgium, Canada and Denmark.

 

 

When the missing information was correctly included, it painted a very different picture of the dangers of high government debt levels. In the original report, whenever countries reached overall government levels of 90%, they experienced negative GDP growth--essentially, a recession--in aggregate over the countries studied. With the new data, countries crossing that threshold, in aggregate, actually experienced 2.2% positive growth levels.

 

 

This revisionist view is actually being confirmed in the real world. Japan has the highest debt-to-GDP ratio in the world, well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low (as, to be fair, has its economic growth). Southern European countries that have embraced austerity--like Greece, Spain and Portugal--have endured multiple recessions, the opposite of what the original (flawed) Reinhart/Rogoff data suggested. The United States, which opted for a stimulus approach to the 2008 meltdown, is recovering faster than any developed country in the world.

 

 

Getting the economy healthy accomplishes two things: it lowers the budget deficits by bringing in more tax revenues, and it further lowers the debt-to-GDP ratio by expanding the GDP number in the equation. Nobody argues that America can keep piling up debt forever. But it seems clear, from the data on the ground and from the corrected data in the influential report, that the stimulus efforts after the Great Recession weren't quite the terrible decision that they are sometimes made out to be.

 

 

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

 

 

 

 

 


Sources:

www.bobveres.com

http://economix.blogs.nytimes.com/2013/04/22/the-incredible-shrinking-budget-deficit/?partner=yahoofinance

http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

http://www.businessinsider.com/paul-krugman-is-right-2013-4

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
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