Economic trends and their policy implications

I wanted to clarify a few things that came up in the "Evidence Mounts That The Vote May Have Been Hacked" thread. I also wanted to provide a new thread for this topic to un-hijack BumbleBeeBoogie's thread.



This is only half the story, or rather, a third of the story. While you might be doing well in the financial markets, and I laud your obvious skills, the broader story merits a change in course. In particular, while you've provided some good data on budget deficits and other economic indicators, you've neglected recent trends in the last four years and the current account deficit. Data on these are what trouble me.

The last four years have heralded a swing from more than a 2% budget surplus to a 4% deficit. This is an unprecedented turnaround, and if our government continues to spend at such a level with such low tax returns, we could quickly break previous absolute budget deficit levels. See http://www.cbpp.org/10-14-04bud.htm. We have already broken several records. That same paper notes:

• At 3.6 percent of GDP, the 2004 deficit marks the fourth consecutive year of fiscal deterioration, the first time this has happened since the U.S. entered World War II.

• At 3.6 percent of GDP, the 2004 deficit is up from the 2003 level of 3.5 percent of GDP and is the highest level since 1993.

• The deficit increased in 2004 even though the recession officially ended in November 2001. This is the first time since before the Depression of the 1930s that the deficit has continued to increase this far into a recovery.

• At $413 billion, the 2004 deficit was $36 billion higher than the 2003 deficit, which stood at $377 billion.

Unfortunately, budget deficits are only a small part of the fiscal problem. We're also experiencing an unprecedented current account deficit at around 5.5 percent of GDP?-this is what makes the budget deficit such a problem. See,e.g. http://www.perjacobsson.org/2004/100304.pdf. Although you can find this information on hundreds of sources, Summers' paper also provides some predictions on future current account deficits if we continue on our present path. I urge you to read these predictions with a grain of salt; the devaluation of the dollar will probably slow down the growth of our current account deficit (Summers also doesn't appear to believe that we'll experience complete continuity). However, the threat of the "twin" deficits is more real than ever, and it would take a major (and possibly painful) devaluation to fully turn around, dent, or even significantly slow down the deficit.

While I gladly take notice of the fact that employment has gone up in the recent past, and that our GDP is heading in the right direction, underlying problems persist. I pray that the administration and Congress don't simply look at the sunny side of this story. The "twin deficits" and present trends in spending/taxing caution against optimistic blindness. I hope that Bush's apparent inflexibility and aversion to empiricism don't extend to his fiscal policy?-we simply cannot repeat the last four years.