In an August 12 commentary, economists Simon Johnson and James Kwak said that the single biggest step the government could take to reduce the structural deficit would be to allow all the Bush tax cuts to expire. Since tax cuts are an inefficient form of stimulus, they could be partially offset by more efficient stimulus programs at lower budgetary cost.
In an August 11 commentary, economists Carmen Reinhart and Ken Rogoff summarized the results of their previous published research on the deleterious effects of a high debt/GDP ratio. They reiterate their belief that when this ratio reaches 90 percent it leads to a significant decline in economic growth. (The Congressional Budget Office estimates that the U.S. will reach this threshold in 2020.)
Also on August 11, the Brooking Institution issued a study on extension of the Bush tax cuts in the context of the budget. The study notes that spending just for Social Security, Medicare, Medicaid, defense, and interest on debt will exceed 106 percent of 2020 tax revenues.
In an August 10 commentary, Boston University economist Laurence Kotlikoff calculates the long-run fiscal gap at 14 percent of GDP. In other words, taxes would have to roughly double or spending would have to be cut by about two-thirds to achieve fiscal balance.
An August 7 study by Banca d’Italia economists Giuseppe Grande and Fabio Panetta warned that a rise in interest rates could create problems for the banking system because banks are large owners of bonds that would suffer capital losses.
An August 4 working paper from the International Monetary Fund examined the impact of budget deficits on interest rates. The baseline estimate is that long-term rates rise by 20 basis points for each percentage point rise in the deficit. However, the impact on interest rates could be much higher—50 basis points or more—when the initial deficit level is high.
On August 3, MIT economist Simon Johnson testified before the Senate Budget Committee on the long-term budget outlook. Although the problem is serious, he believes there are many possible solutions.
On June 29, the Congressional Research Service updated its estimate of the cost of the wars in Iraq and Afghanistan. According to the report, the former has cost$715 billion and the latter $297 billion thus far.
I previously posted items on this topic on August 2 and July 28.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily and writes a weekly column at The Fiscal Times. Read his most recent column here. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).
