US Fiscal Problems APPENDICES Jeffrey Frankel Senior Executive Fellows, February 25, 2013.
-
Upload
geoffrey-montgomery -
Category
Documents
-
view
216 -
download
0
Transcript of US Fiscal Problems APPENDICES Jeffrey Frankel Senior Executive Fellows, February 25, 2013.
US Fiscal Problems
APPENDICES
Jeffrey Frankel
Senior Executive Fellows, February 25, 2013
Appendices
• I: American “fiscal conservatives” are (mostly) not fiscal conservatives.
• II: Role reversal in Emerging Markets
• III: The long-term U.S. debt problem– (1) Where did today’s deficits come from?– (2) What will drive deficits in the future?
• IV: The medium-term outlook
Appendix I: 3 pieces of evidence to support the claim that US “fiscal conservatives” are not:
• (i) The voting pattern among the 258 Congressmen who signed an unconditional pledge not to raise taxes:– They had voted for more spending
than those who did not sign the pledge. [2]
• (ii) The pattern of spending under different presidents.[3]
• (iii) The pattern of states whose Senators win pork & other federal spending. [4]
• [2] William Gale & Brennan Kelly, 2004, “The ‘No New Taxes’ Pledge,” Tax Notes, July. • [3] JF “Snake-Oil Tax Cuts,” EPI, Briefing Paper 221. 2008. • [4] JF Red States, Blue States and the Distribution of Federal Spending, 3/31/2010.
Vs. the 1990s: The Shared Sacrifice approach succeeded in eliminating budget deficits, importantly by slowing spending.
-3
-1
1
3
5
7
9
11
13
15
10
12
14
16
18
20
22
24
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Est
20
09
Est
20
10
Est
Spending and Budget Balance(inverse) as % of GDP (Current US$)
Spending/GDP Budget Balance/GDP
R. R
ea
ga
n
J. C
art
er
G.H
.W.
Bu
sh
W.J
. C
lin
ton
G.W
.Bu
sh
Source: OMB
ρ = 0.86
(ii) Spending & deficits both rose sharply when Presidents Reagan, Bush I, & Bush II took office.
Budget deficit
Spending
(iii) States ranked by federal spending receivedper tax dollar
versus party vote ratio in preceding election
Republican states take home significantly more federal $ (relative to taxes paid) than Democratic states.
“red”states
“blue”states
low inflow of US $
big inflow of US $
even while weakening in advanced economies.
World Economic Outlook, IMF, April 2012
Historic Role Reversal:Public finances in Emerging Markets
have become much stronger since 2000
Appendix II: Historic Role Reversal:Public finances in Emerging Markets
have become much stronger since 2000
Other advanced countries have the same long-term problem as the US: Rich countries’ Debt/GDP is the highest since the WWII spike.
US debt > big EMsbut < some other advanced countries
http://www.marketobservation.com/blogs/media/blogs/Statistics/DebtGDP.jpg
9
Remarkable role-reversalin fiscal policy among Emerging Markets
• Debt/GDP of rich countries (> 90%) is nowthree times that of emerging markets;
=>• Some EMs Economies are now more creditworthy
than some Advanced Economies• as reflected in credit ratings or sovereign spreads.
Country creditworthiness is now inter-shuffled
“Advanced” countries (Formerly) “Developing” countries
AAA Germany, UK Singapore, Hong Kong
AA+ US, France
AA Belgium Chile
AA- Japan China
A+ Korea
A Malaysia, South Africa
A- Brazil, Thailand, Botswana
BBB+ Ireland, Italy, Spain
BBB- Iceland Colombia, India
BB+ Indonesia, Philippines
BB Portugal Costa Rica, Jordan
B Burkina Faso
SD GreeceS&P ratings, Feb.2012 updated 8/2012
World Economic Outlook, IMF, April 2012
Another indication of improved EM creditworthiness: EM sovereigns used to have to pay higher interest rates
than many US corporates (BB), but now pay less.
Copyright Jeffrey Frankel,
In the textbooks, benevolent governments are supposed to use discretionary policy to dampen cyclical fluctuations,
expanding at times of excess supply, andcontracting at times of excess demand.
But in practice, …Governments would raise spending in booms;and then be forced to cut back in downturns
Cyclicality of Fiscal Policy
• They took advantage of the 2002-07 boom
to strengthen their budget positions,• allowing them to run deficits
when the global recession hit in 2008-09.
• Some examples:– China was able to respond with big stimulus.– Chile, Korea, Malaysia, Botswana, Indonesia.
Another respect in which many EMs have improved their policies
since the crises of the late-1990s:A shift from pro-cyclical fiscal policy to counter-cyclical
pro
cyclic
al }
G always used to be pro-cyclical for most developing countries.
cou
nte
rcyclic
all
Adapted from Kaminsky, Reinhart & Vegh, 2004, “When It Rains It Pours”
Pro-cyclical spending
Counter-cyclical spending
Correlations between Gov.t Spending & GDP1960-1999
Correlations between Gov.t Spending & GDP 2000-2009
In the last decade, about 1/3 developing countries
switched to countercyclical fiscal policy:Negative correlation of G & GDP.
Frankel, Vegh & Vuletin (2011)
pro
cyclic
al
cou
nte
rcyclic
al
To summarize the fiscal role reversal,
• Many Emerging Markets countries have, so far this century, achieved:– Lower debt levels than advanced economies;– improved credit ratings;– lower sovereign spreads; and– less pro-cyclical fiscal policies.
Most Emerging Market countries learned from the debt crises of the 1980s & 1990s.
But many leaders in advanced economies failed to do so.
• They thought it could never happen to them --
• most notably, leaders of euroland,– even after the periphery countries
violated the deficit & debt ceilings of Maastricht and the SGP;
– And even after the Greek crisis hit in late 2009 .
But Reinhart & Rogoff remind us: sovereign default is an old story, including among advanced countries –This Time is Different, updated in “From Financial Crash to Debt Crisis,” 2010
Sovereign External Debt: 1800-2009 Percent of Countries in Default or
Restructuring50%-
Sources:Lindert & Morton (1989), Macdonald (2003), Purcell & Kaufman (1993), Reinhart, Rogoff & Savastano (2003), Suter (1992), and Standard & Poor’s (various years). Notes: Sample size includes all countries, out of a total of sixty six listed in Table 1, that were independent states in the given year
1980s1930s1870
s1830s
Carmen Reinhart & Kenneth Rogoff found a growth threshold in Debt/GDP of 90%.
MoneyHoney blog, Feb.20, 2010 ‘Growth in a Time of Debt’
GDP growth
Debt/GDP < 90%
20
The historic role reversal• Debt levels among rich countries (debt/GDP ratios > 80%)
by 2008 reached twice those of emerging markets.
• Some emerging markets have earned credit ratings higher than some so-called advanced countries.
• Over the last decade some emerging market countries finally developed countercyclical fiscal policies:
• They took advantage of the boom years 2003-2007 – to run primary budget surpluses and cumulate reserves.
• By 2007, Latin America had reduced its debt to 33% of GDP, – vs. 63 % in the US.
– And so were able to respond to global recession of 2008-09 .
The Greek budget deficitnever got below the 3% of GDP limit,
nor did the debt ever decline toward the 60% limit
21
Appendix III: The Long-term US debt problem
• (1) From where did today’s debt come?
• (2) What will drive debt in the future?– The problem is not budget deficits
in the next few years.– The problem is the far larger increases in
entitlement programs based on current promises.
As of 2000, Debt/GDP had been on a declining path. What changed?
(1) From where did today’s debt come?$13 trillion in 2011 debt,relative to 2001 official projection
Over-optimistic economic assumptions in 2001, e.g., growth rate
Bush tax cuts (which were supposed to expire in 2011)
Wars in Iraq &Afghanistan (so far)}
}
}
Source: The Great Debt Shift: Drivers of Federal Debt Since 2001,Pew Charitable Trust.
Fiscal stimulus {in response to the recession accounts for < 1/3 of 2009-11 deficits
and has virtually disappeared by now.
CBPP, May 2011
{Obamastimulus
Budget deficits have declined since 2009.
Jan. 2013 fiscal cliff:Letting the Bush tax cuts expire
on schedule would have stabilized debt/GDP
CBPP, May 2011
(2) The long-term problem
World Economic Outlook, IMF, April 2012
Euro-recession is pulling down growth.
The US is doing better.
GDP growth forecasts (percent)
Emerging Market growth is slowing too, but solidly >0.
Appendix IV: The medium-term outlook.
2007 2008 2009 2010 201112,200
12,400
12,600
12,800
13,000
13,200
13,400
13,600
After 3 years, the U.S. in 2011 finally achieved its pre-recession level of GDP
Rea
l GD
P
(b
illio
ns
of c
hai
n-t
ype
(200
5) d
olla
rs s
easo
nal
ly
adju
sted
at
ann
ual
rat
es)
Source: Macroeconomic Advisers www.macroadvisers.comMon
Obama Inauguration
End of recession
Jan. 2007 – Dec. 2011, monthly, estimated by Macroeconomic Advisers
After 3 years, the U.S. in 2011 finally achieved its pre-recession level of GDP
Jan. 2007 – Feb. 2012, monthly, estimated by Macroeconomic Advisers
Obama Inauguration
End of recession
Data Source: U.S. Bureau of Labor Statistics
Obama Inauguration
End of recession Private
sector job creation (by quarter)
Average rate of private job creation between the two recessions (Nov. 2001-Dec.2007)
Average rate of private job creation throughout 8 Bush years(Jan. 2001-Jan.2009)
Possible risks to the recovery in 2013
• Euroland: Return of sovereign debt crisis?– and contagion to other high Debt/GDP countries.
• Political breakdown in Washington?• like the debt ceiling standoff of August 2011• which led S&P to downgrade US from AAA to AA
» for the 1st time in history.
• Major oil crisis?– from military confrontation with Iran.
• If we opt for short-term fiscal stimulus,– or at least on counteracting the current fiscal contraction,
• what form should it take?
U.S. fiscal policy in 2013
• Renew some elements of the Obama stimulus – such as infrastructure investment (roads & bridges) – & giving money to the states
• so that they can re-hire laid-off teachers, policemen, firemen, subway drivers & construction workers
– as in the Jobs Bill that the Congress voted down.
US Fiscal Problems
Jeffrey FrankelHarpel Professor of Capital Formation and Growth
Harvard Kennedy School