Tuesday, July 26, 2011

Charts of the Week, Mark II: A Quick Look at the Federal Budget, Past, Present and Future

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

Yesterday we started a new feature, "Chart of the Week," with a bellwether chart on housing starts over six decades.

Last night, while watching President Obama, Speaker Boehner, and many others opine on our fiscal situation and the debt ceiling, I was moved to re-consult two charts I've used in class recently.

The first chart shows history: it looks at actual outlays and receipts as a share of GDP, annually, from 1950 to 2010. From this we see we have the largest deficit since WWII, because we've managed to combine the highest spending since WWII (Medicare, Medicaid, two wars, "stimulus,"... with: the lowest revenues, as a share of GDP (thanks to the deepest recession, large tax cuts, and a complex set of tax expenditures that beggar belief).

The second chart is a forecast: it shows CBO projections of what would happen to major elements of the budget if past trends in health costs meet the aging boomers. Like all forecasts, in fact more than most, this is a "what-if;" personally I don't think we'll ever see such an untrammeled increase in national income devoted to Medicare/Medicaid in 40 years, but it does tell us we have work to do to fix it. Note also the scary rise in interest paid is despite very conservative assumptions about interest rates, assumptions that may be blown out of the water very shortly.

Presumably our political leaders on both side of the aisles know about these charts. But you wouldn't know if from their recent statements and (lack of) actions.

Our blog presents a range of viewpoints, and you should know that our faculty have a range of views on exactly how to close these gaps. These are not simple questions.

But there is no disagreement on the basic facts in these two charts.

There are lots of ideas out there about how to tackle the deficit issue. My personal views run more along the lines of the Rivlin-Dominici and Bowles-Simpson plans, because Chart 1 reinforces my own view that both revenue increases and spending cuts will be required within a few years to fix this.

What revenue increases, what spending cuts? There is no shortage of ideas and info out there; I have learned from the Brookings Institution as well as our friend Menzie Chinn's (and James Hamilton's) Econobrowser, one of the best macro blogs.

In fact, this morning I noticed that Menzie has a recent entry presenting a version of our first figure (quarterly, with a slightly shorter time span).

Don't like the plans out there? Build your own! The Congressional Budget Office offers "Reducing the Federal Deficit: Spending and Revenue Options" with details, including good estimates of savings, of over 100 options. Last year I assigned my undergrad class the task of building their own plan from this source; feel free to turn your own plan in to me for grading!

Until recently, I thought we had some time to rein the deficit in, though we faced a version of Zeno's paradox: we have to start sometime. The urgency of this posting was originally because of the looming impact of the Federal debt ceiling. This could have extraordinarily serious effects on the economy and on real estate markets. Bertrand Renaud, my good friend and former World Bank colleague, recently pointed me towards "Mortgage Professor" Jack Guttentag's take on this.

But recent reports from the ratings agencies suggest I was too sanguine about the timing of a credible deficit reduction plan, and that a downgrade could come soon; see

Debt Drama Blocks Out Big Picture on Credit, NYT DealBook, 7/25/11


Downgrade Threat Looms, WSJ, 7/26/11 (subs required)

Frankly, I'm worried. Bond markets (and stock and real estate markets) could be facing big hits very fast from a default on U.S. debt, "technical" or not, and a rating agency downgrade would be serious stuff even in the absence of default. You've probably heard the current saying, "If you liked September 2008, you'll LOVE August 2011."

Let's shortcut that prediction. We need to put the heat on Congress and the Administration to get a deal done to preserve the U.S.'s credit standing. Now.

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