Sustained Budget Deficits, Research Paper Example

Through strict adherence to fiscal conservatism, the Obama Administration has drastically turned arround the U.S. deficit from its 2008 numbers. This is specifically in respect to estimated data that that shows “FY 2014: $483 bln, FY 2013: $680 bln, FY 2012: $1,087 bln, FY 2011 $1,300 bln, FY 2010: $1,294 bln” (Fiscal Year Budget, 2013) compared to the Bush administration which had a deficit nearing $1,500 billion by the start of the Obama Administration. The following will assess how this occurred and critique the current budget.

Herndon (2014) and authors assess the impact high public debt has on stifling economic growth by replicating Reinhart and Rogoff’s (RR) 2010 study finding errors in weighitng elective exclusion available of financial data. The main premise of Reinhart and Rogoff is that when country are operating with significant debt, specifically when a country functions with a public to debt ratio over 90 percent GDP growth is lowered by 0.1 percent. Herndon (2014) and authors find that Reinhart and Rogoff are actually off in their assessment. The authors note that the decline in GDP when a country is operating a budget with a debt ratio over 90 percent actually sees a decline in GDP growth of 2.2 percept. This is substantially higher. The authors attribute this fallacy in their findings to the fact that “the RR methods are non-parametric and appealingly straight forward. RR organizes country-years in four groups by public debt/GDP ratios, 0–30percent, 30–60 percent, 60–90 percent, and greater than 90 percent” (Herndon et al., 2014). Despite the miscalculations within the RR study, Herndon and authors note that the study has contributed greatly to economists placing an importance on public policy concerns in regards to debt management and its impact on GDP growth in the United States.

In Christopher Condon’s November 2014 article on the U.S. budget deficit and its massive decline, the author notes that the deficit under President Obama has reached dramatically low levels and that the turn around from 2008 to 2014 represents the sharpest economic turnaround in he past 46 years. Condon attributes this drastic shift to robust economic growth that enabled the U.S. deficit to decline back to 2008 ratings. Condon notes that, the shortfall of $483.4 billion in the 12 months ended Sept. 30 was 2.8 percent of the nation’s gross domestic product of $17.2 trillion over the same period, according to data compiled by Bloomberg using Commerce Department figures. The figure peaked at 10.1 percent of GDP in December 2009″ (Condon, 2014). Much of these drastic change can be traced back to the fiscal year 2013 budget stated by President Barack Obama.

In there 2004 study “Sustained Budget Deficits: the Risk of Financial and Fiscal Dissarray,” Rubin and authors predicted the epic rise of the U.S. Federal government debt. The authors stated in 2004 that the U.S. government budget was on an “unsustainable path,” and further stated that “in the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade.  Such deficits will cause U.S. government debt, relative to GDP, to rise significantly” (Rubin et al., 2004). The authors further point out that following this rise in debt, the babyboomer genreation is set to reach retirement age, which would require them to claim Social Securitys well as Medicare benefits, which wil result in an even sharper rise in the U.S. Federal Debt.  This also results in an increase in external borrowing which further increases the debt and creates a decline in domestic investing (Pendleton et al., 2014). Reductions in domestic investment are credited as the cause of reductions in productivity growth as well as a reduction in potential national income in the future. High national debt creates a situation where the cost of operating with a sustained deficit can increase gradually over time calling for progressive actions to be taken that can tend to build gradually over time, rather than occurring suddenly. Herndon and authors note however that, “the adverse consequences of sustained large budget deficits may well be far larger and occur more suddenly than traditional analysis suggests, however. Substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad” (Rubin et al., 2004). The main point the authors try to convey is that the impact of a country functioning with a large budget deficit is much more substantial that traditional financial analysis tools can identify (Gokhale &Smetters, 2014). The authors attribute this discrepancy to the fact that financial analysis tools used to assess small budgets or temporary budgets and their impact are more effective than when they are attempting to evaluate the influence of large, long lasting, or permanent debt. This is due to the fact that significantly large ongoing deficits have a much more severe adverse impact on the confidence people have in the market and the expectations associated with that market’s ability generate new growth (Rubin et al., 2004).

In sum, in the 2013 Fiscal year U.S. Budget President Barack Obama mapped out key strategic elements he identified would help to continue the economic budgetary progress, but also the policies that enabled the government to get to its current point. In the budget the President notes several key elements to his budgetary strategy that he feels would improve the United States Economy, specifically, “to sustain a global reach….through investing in critical partnerships and alliances, including NATO… no longer sizing the military for large scale prolonged operations,… reductions in defense spending to save $487 billion over the next 10 years” (Fiscal Year 2013 Budget, 2013). The president closes by predicting the deficit will end over the course of the next decade. This would mark a savings of 4 trillion dollars. Based on current trends and improvements in the economy and the current state of the deficit it is clear that the United States government ahas made substantial improvements in its budgetary management from since 2008. This critique is based largely on the ability of the Obama administration to reduce spending while producing drastic GDP growth.

References

Condon, Christopher (2014). U.S. Deficit Decline to 2.8% of GDP Is Unprecedented Turn. Bloomberg.

Gokhale, J., & Smetters, K. (2014). America’s budget book-keeping scandal. Development.

Herndon, T., Ash, M., & Pollin, R. (2014). Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge journal of economics, 38(2), 257-279.

Office of Management and Budget. (2013) Fiscal Year 2013 Budgete of the U.S. Government. United States Government.

Pendleton, J. H., Geiger, R. K., Burkard, R. P., Harmatz, J., McMurdie, T. J., Moon, J. L., … & Wilkins-Mckee, E. S. (2014). Defense Headquarters: Guidance Needed to Transition US Central Command’s Costs to the Base Budget (No. GAO-14-440). Government Accountability Office Washington Dc.

Rubin, R. E., Orszag, P. R., & Sinai, A. (2004). Sustained Budget Deficits: the Risk of Financial and Fiscal Disarray.