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Economic Policy Institute Deficits and Economic Recovery John Irons, Ph.D. Research and Policy Director Economic

Overview. . 2. Overview. Economy; focus on jobsHow bad? How long?Federal RevenuesHistory and compositionNear-termBailout impactRecessionRecovery packageRecovery Package: Bang for the BuckConclusion. 3. Overview. Bottom Line:Job weakness will persist for 2-3 years or moreCurrent deficits

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Economic Policy Institute Deficits and Economic Recovery John Irons, Ph.D. Research and Policy Director Economic

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    1. Economic Policy Institute Deficits and Economic Recovery   John Irons, Ph.D. Research and Policy Director Economic Policy Institute Washington, DC Tuesday, November 18, 2008 1

    2. Overview 2

    3. Overview Economy; focus on jobs How bad? How long? Federal Revenues History and composition Near-term Bailout impact Recession Recovery package Recovery Package: Bang for the Buck Conclusion 3

    4. Overview Bottom Line: Job weakness will persist for 2-3 years or more Current deficits are within historic norms and are stable Economic downturn/bailouts will increase deficits, but Deficits are OK in a recession A recovery will improve the situation Deficit reduction must be weighed against other priorities Long-run policy changes can provide additional revenue and stabilize the national debt A well-designed recovery package can stimulate the economy and create jobs 4

    5. Economy/Jobs A look back at the prior 2 recessions 5

    6. Total Nonfarm Employment, January 1985 - September 2008 (Millions) Both the 1990-91 and the 2001 recessions lasted only 8 months, but it took the labor market 11 months and 30 months, respectively, to finally hit bottom. Further, with sluggish growth even after hitting bottom, it took 32 months and 48 months to regain the total number of jobs that existed prior to the downturn. 6

    7. A similar pattern emerges when looking at other measures of employment. Total private employment in the 1990-91 and 2001 recessions took 23 and 31 months to hit bottom; and 38 and 54 months to recover. 7 Total Private Employment, January 1985 - September 2008 (Millions)

    8. Construction Employment, January 1985 - September 2008 (Millions) The construction industry took longer to recover in the 1990s, taking over 6 years to reach pre-recession levels. Although it recovered faster during the 2000s that situation was an exception, owing in large part to the unique construction boom. We can unfortunately expect the construction labor market to look more like the 1990s. 8

    9. Deficits, Debt and Revenue Long-run perspective 9

    10. Federal Revenue and Outlays: share of GDP: 1929-2017* 10 WWII is obvious Deficit increases under Reagan Surplus under clinton No “explosion” in spending over last 30 years. However, there is a difference in composition, with military spending taking a larger share under Reagan and Bush, for example.WWII is obvious Deficit increases under Reagan Surplus under clinton No “explosion” in spending over last 30 years. However, there is a difference in composition, with military spending taking a larger share under Reagan and Bush, for example.

    11. Federal Surplus or Deficit: 1955-2008 11 Bush policies brought us from surplus to deficitsDrop from Clinton years. But note that in 1992, deficits were larger than in 2008.Bush policies brought us from surplus to deficitsDrop from Clinton years. But note that in 1992, deficits were larger than in 2008.

    12. Federal Debt Held by the Public: 1940-2017* 12 Debt as a share of the economy is currently about 40% of the economy. Below the average of the last 65 years and below the average of the 1990s. An increase in the debt level would not create excessive instabilities.Debt as a share of the economy is currently about 40% of the economy. Below the average of the last 65 years and below the average of the 1990s. An increase in the debt level would not create excessive instabilities.

    13. Composition of Federal Revenue 1947-2007 13 Income taxes provide a solid foundation at about ˝ of revenues. Shift from corporate taxes to social insurance taxes.Income taxes provide a solid foundation at about ˝ of revenues. Shift from corporate taxes to social insurance taxes.

    14. Near-term Outlook What does 2009 look like? 14

    15. Near Term Outlook (2009) Baseline deficit. The CBO baseline projection is $438 billion or 3.0 percent of GDP; there is already some economic deterioration built-in to current estimates. Cyclical component. The CBO estimates that of the $438 billion deficit, $185 billion is due to a cyclical component. This leaves a cyclically-adjusted deficit of $254 billion, or about 1.7 percent of GDP. Debt. The national debt held by the public was projected to be about 40% of GDP in 2009. Financial Market Bailout: will increase size of the national debt. BUT! most of the new debt has been, or will be, used to acquire assets. Thus the long-term impact of the bailout on the debt will be small given that the program is temporary and that the acquired assets will eventually be sold and used to repay national debt. 15 Baseline. Cyclical component. The bump up in the deficit is in part due to lower revenues and higher outlays directly as a result of slow economic growth. As such, the bottom-line deficit number will improve automatically as the economy recovers. The CBO estimates that of the $438 billion deficit, $185 billion is due to a cyclical component. This leaves a cyclically-adjusted deficit of $254 billion, or about 1.7 percent of GDP. Debt. The national debt held by the public was projected to be about 40% of GDP in 2009. We will likely see a jump in the size of the national debt as a result of bailout activities of the Treasury and the Federal Reserve. It is important to note that most of the new debt has been, or will be, used to acquire assets. As such, the increase in nation’s liabilities is coupled with an increase in the nation’s assets. To the extent that the incurred liabilities (new borrowing) outweigh the value of the assets acquired, this represents a deterioration of the financial position of the government. This deterioration will be significantly less than, for example, the $700 billion authority given to the Treasury to implement the TARP. Thus the long-term impact of the bailout on the debt will be small given that the program is temporary and that the acquired assets will eventually be sold and used to repay national debt. Enacted and likely legislation. The bailout legislation also included a number of other provisions that will impact the federal deficit. As noted, the final cost of the TARP program is unknown, but will be significantly less than the $700 billion in authority. The energy component would cost an estimated $7 billion over 5 years, and just $1 billion in 2009. The tax extenders and AMT components would cost $112 billion over 5 years, with most of this cost ($105 billion) coming in 2009. The size of a fiscal recovery package has yet to be determined, but a comprehensive package would likely be in the range of $150-300 billion. In total, a deficit of around $700 billion is plausible for 2009 (see table). Thus even if congress were to enact a sizeable recovery package, deficits would remain under $1 trillion. Looking forward, an economic recovery would mean an improvement over these levels—to the tune of $370 billion as the cyclical component dissipated. Further, debt levels would stabilize and ultimately decline as deficits return to sustainable levels and as assets acquired during the bailout are re-sold. As such, the current fiscal situation should not be seen as a critical barrier to long-term investments in the economy.Baseline. Cyclical component. The bump up in the deficit is in part due to lower revenues and higher outlays directly as a result of slow economic growth. As such, the bottom-line deficit number will improve automatically as the economy recovers. The CBO estimates that of the $438 billion deficit, $185 billion is due to a cyclical component. This leaves a cyclically-adjusted deficit of $254 billion, or about 1.7 percent of GDP. Debt. The national debt held by the public was projected to be about 40% of GDP in 2009. We will likely see a jump in the size of the national debt as a result of bailout activities of the Treasury and the Federal Reserve. It is important to note that most of the new debt has been, or will be, used to acquire assets. As such, the increase in nation’s liabilities is coupled with an increase in the nation’s assets. To the extent that the incurred liabilities (new borrowing) outweigh the value of the assets acquired, this represents a deterioration of the financial position of the government. This deterioration will be significantly less than, for example, the $700 billion authority given to the Treasury to implement the TARP. Thus the long-term impact of the bailout on the debt will be small given that the program is temporary and that the acquired assets will eventually be sold and used to repay national debt. Enacted and likely legislation. The bailout legislation also included a number of other provisions that will impact the federal deficit. As noted, the final cost of the TARP program is unknown, but will be significantly less than the $700 billion in authority. The energy component would cost an estimated $7 billion over 5 years, and just $1 billion in 2009. The tax extenders and AMT components would cost $112 billion over 5 years, with most of this cost ($105 billion) coming in 2009.

    16. Near Term Enacted and likely legislation. Bailout: TARP much less than $700 billion Energy: $1 billion in 2009. The tax extenders and AMT $105 billion in 2009. Recovery: TBD; a comprehensive package would likely be in the range of $150-300 billion or larger. 16

    17. Near Term In total, a deficit of around $700 billion or about 5% of GDP is plausible for 2009 (with bailout, and a weakening economy, and other new legislation) HOWEVER: debt levels currently within historical norms an economic recovery would mean an improvement to the tune of $370 billion as the cyclical component dissipated. debt levels would stabilize and ultimately decline as deficits return to sustainable levels and as assets acquired during the bailout are sold. 17

    18. Recovery Package Bang for the buck 18

    19. Recovery Package Aid to states ($50-75 billion) Infrastructure ($75 billion+) Roads, Schools, Water Systems Expanded Supports Extended Unemployment Benefits: 7 additional weeks: ($6.5 billion) Food Stamps: ($5-12 billion) Down-payment on longer-term priorities Green jobs 19

    20. Recovery Package: Bang for the Buck Impact of $1 of stimulus on GDP. 20

    21. Conclusion 21

    22. Conclusion Continuing weakness in labor markets likely to persist for another 2 to 3 years, total private and construction employment taking as much as 4 years to fully recover. Current deficits/debt levels are within historic norms Temporary increases to deficits and debt are OK in a recession Long-term policy change may be needed to reduce debt down the road, but… The current fiscal situation should not be seen as a critical barrier to expanded investments in the economy. 22

    23. Economic Policy Institute Deficits and Economic Recovery   John Irons, Ph.D. Research and Policy Director Economic Policy Institute Washington, DC Tuesday, November 18, 2008 23

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