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Where's all the debt coming from?

economix-14imfdebt-custom1.jpg

The financial crisis and the resulting recession have coincided with a rapid run-up in American -- and global -- government debt. A lot of people, understandably enough, assume that this is the product of government spending. The stimulus was expensive, and the bank rescues seemed expensive, and we just passed a health-care reform plan, and that must be why the deficit blew up.

The IMF, in a new report (pdf), explains that that's not the case. "Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09," they write. Check out the graph atop this post: New spending isn't nearly as large a contributor to the increase in debt as reduced revenue is.

The mechanism here is simple enough. As Paul Krugman explains it, "the financial crisis has made us permanently poorer, which among other things reduces revenue." Recessions reduce income, reducing income reduces taxable income, and that in turn reduces the revenue that normally keeps governments out of debt.

This isn't just an interesting explanatory point, though. It's a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed. The more willing we are to accept permanently higher unemployment and permanently lower growth, the harder it's going to be to get our debt under control.

By Ezra Klein  |  May 17, 2010; 4:41 PM ET
Categories:  Budget  
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Comments

So...

When bidness is boomin', the money starts flowing into the coffers.

THAT'S WHAT CONSERVATIVES HAVE BEEN TRYING TO TELL THE NUMB-NUTZ LIBERALS FOREVER.

Want to ease the deficit? Try promoting business instead of the socialist anti-business rape-and-spend policies we've seen so far.

Posted by: WrongfulDeath | May 17, 2010 4:50 PM | Report abuse

Does doing "whatever it takes to get economic growth back up to speed" include foregoing "health" taxes on businesses, reducing regulatory burdens, eliminating regulations on carbon emissions, etc., etc.? Exactly what aspect of the Social-Democrat Party's liberal agenda addresses "whatever it takes to get economic growth back up to speed"?

Posted by: rmgregory | May 17, 2010 5:19 PM | Report abuse

"It's a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed."

Ezra, what's the baseline for the revenue loss comparison? 2007?

More specifically, how much of the "lost" revenue was based on an unsustainable bubble economy of either real estate or prior to that technology stocks? I believe your fellow columnist Steven Pearlstein referred to it as the "mirage economy".

The Fading of the Mirage Economy

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/27/AR2008052703077.html

The IMF sounds almost like it is channeling policy prescriptions from the Onion article from a while back:

"Recession-Plagued Nation Demands New Bubble To Invest In"

http://www.theonion.com/articles/recessionplagued-nation-demands-new-bubble-to-inve,2486/

"What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution.

The current economic woes, brought on by the collapse of the so-called "housing bubble," are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent."

"The manner of bubble isn't important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct."

"The U.S. economy cannot survive on sound investments alone"

Posted by: jnc4p | May 17, 2010 5:47 PM | Report abuse

"It's a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed."

Exactly, the growth is what will save us and what better way than TAX CUTS for that!

Hey Ezra, did you not hear that non-sense from our great Economists like Sarah Palin, New Gringrich, Boehner and Cantor? You see Ezra, you miss the true advise which will take this country out of all these doldrums.

(Please ignore how such faulty tax cuts in Bush era created unsustainable growth in the first place to take us on the higher side of revenue for couple of years. Remember Dow 14K?)

Posted by: umesh409 | May 17, 2010 10:08 PM | Report abuse

"Try promoting business instead of the socialist anti-business rape-and-spend policies we've seen so far."

Ummm, Clinton created 33 million jobs. Bush almost literally lost jobs during his eight years.

Also, Obama saved the US auto industry from certain demise whilst conservatives demanded we let them fail. And now the US auto industry is making profits and keeping millions of people employed.

The historical record proves that conservatives know how to do nothing but destroy jobs and create debt.

Posted by: Lomillialor | May 17, 2010 10:25 PM | Report abuse

"It's a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed. "

Were you momentarily possessed by Ronald Reagan? Economic growth was overheated by all of the unnecessary "stimulus" Bush applied and applied. Things crashed and Obama multiplied. If they would stop overheating and cheating, our prosperity wouldn't be so fleeting.

Too much debt when we had a lot of revenue makes problems much worse when revenue drops. When we had high growth, we still had high debt. This was the insanity of Bush. Now the Democrats want to go that route too. Maybe we do need a Tea Party.

Posted by: staticvars | May 17, 2010 10:25 PM | Report abuse

--"The more willing we are to accept permanently higher unemployment and permanently lower growth, the harder it's going to be to get our debt under control."--

That's trademarkable Kleinish gibbering. Exactly what is there about accepting or not accepting a reported number that creates or doesn't create a job? Maybe if you wish really hard someone will create a job somewhere, and if everyone wishes really hard together a lot of jobs will be created? And if they don't, Klein won't accept it? And then what will he do? Not accept the fact that he bartered away his and his fellow citizens' frail freedoms on little more the richness of the resounding echoes in his head?

Posted by: msoja | May 17, 2010 10:42 PM | Report abuse

Would you mind calling out Robert Samuelson as a big numbskull. He keeps writing the same, wrong-head op-ed piece. It's tiresome and he gets some traction through repetition.

Posted by: grooft | May 17, 2010 10:43 PM | Report abuse

Bill Clinton did not set out to balance the budget. Bill Clinton set out to provide a job for everyone who wanted one. Bill Clinton policies took the unemployment rate to 4%. The budget deficit unexpectedly disappeared and we started running unexpected surplus.

As long as unemployment is at 10% the deficit will be a problem. The solution is to focus on unemployment. People with jobs pay more taxes and consume fewer government services. Fix unemployment and the budget will take care of itself.

Posted by: bakho | May 17, 2010 10:45 PM | Report abuse

bakho

I agree with most of what you say, except the first sentence. Minor nit.

http://en.wikipedia.org/wiki/Bill_Clinton

Clinton in his first address to the nation on February 15, 1993, announced his intention to raise taxes to cap the budget deficit.[39] On February 17, 1993, in a nationally televised address to a joint session of Congress, Clinton unveiled his economic plan. The plan focused on deficit reduction rather than a middle class tax cut, which had been high on his campaign agenda.[40]

Posted by: Lomillialor | May 17, 2010 11:01 PM | Report abuse

--"Bill Clinton policies took the unemployment rate to 4%."--

No, the computer revolution took the unemployment rate to 4%. The nineties were destined for success, no matter which buffoon had the adoration of Klein's ilk.

Posted by: msoja | May 18, 2010 12:23 AM | Report abuse

msoja

The double-oughts were destined for for success too, but we saw how an inept President and his ideological people could muss things up.

If you listen to the opinions of the Internet's greatest architechts and entrepeneurs, they will tell you Al Gore's efforts at enacting legislation to allow the commercialization of DoD technology were key to their success at priming the hi-tech revolution. Also, venture capitalists attribute the fiscal conservatism of the early Clinton years (including tax raises of 93) to having the liquidity needed to fund 1000s of hi-tech startups which led to millions of hi-tech jobs. Such widespread lending is impossible in today's post-Bush, post-debt, world.

Posted by: Lomillialor | May 18, 2010 6:45 AM | Report abuse

--"The double-oughts were destined for for success too, but we saw how an inept President and his ideological people could muss things up."--

The double-oughts started out in a slight recession, if you recall, and then some savages took a whack out of the U.S. financial and economic sector in September 2001. You may have heard about it. It was really touch and go there for a while, in my opinion.

Which doesn't excuse the lack of restraint Dubya and the GOP showed in the aftermath. Why, they acted like Democrats, and there's no excuse for it.

Posted by: msoja | May 18, 2010 8:39 PM | Report abuse

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