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The Economic Crisis and theFiscal Crisis: 2009 and Beyond
Alan Auerbach and William Gale
U.S. Federal Net Debt-GDP Ratio
-10
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 2008 2009
End of Fiscal Year
Perc
ent o
f G
DP
March 2001 Projections
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2001 2002 2003 2004 2005 2006 2007 2008 2009
Sur
plus
as
a P
erce
nt o
f G
DP
Federal Surpluses: 2001 Projections vs. Actual
January 2001 CBO Baseline Projections
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2001 2002 2003 2004 2005 2006 2007 2008 2009
Sur
plus
as
a P
erce
nt o
f G
DP
Federal Surpluses: 2001 Projections vs. Actual
January 2001 CBO Baseline Projections
Observed Surplus
What Happened?
Three Phases:1. The Economy
2. Policy
3. The Great Recession
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
2001 2002 2003 2004 2005 2006 2007 2008 2009
Sur
plus
as
a P
erce
nt o
f G
DP
Federal Surpluses: 2001 Projections vs. Actual
January 2001 CBO Baseline Projections
Economic and Technical Changes
Policy Changes
Observed Surplus
What Happened?
Three Phases:1. The Economy
2. Policy
3. The Great Recession• Increased deficit in 2009 due to weak economy plus
ARRA, TARP, etc., the economy itself the more important factor
U.S. Federal Net Debt-GDP Ratio
-10
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 2008 2009
End of Fiscal Year
Perc
ent o
f G
DP
March 2001 Projections
Actual
U.S. Federal Net Debt-GDP Ratio
0
100
200
300
400
500
600
700
800
900
2001 2011 2021 2031 2041 2051 2061 2071 2081
End of Fiscal Year
Perc
ent o
f G
DP
September 2009 Projections
U.S. Federal Net Debt-GDP Ratio
0
100
200
300
400
500
600
700
800
900
2001 2011 2021 2031 2041 2051 2061 2071 2081
End of Fiscal Year
Perc
ent o
f G
DP
September 2009 Projections
Baseline:Through Permanent Through Permanent
2085 2085
Percent of GDP 5.14 6.93 6.86 8.70$ Trillions (PV) 39.3 100.2 52.5 125.8
CBO Administration
Fiscal Gaps
Implications of Recent Events and Policy Interventions
1. No Worries About the Fed Having No Debt to Buy
2. What is Debt? What isFiscal Policy?
3. The “Old-Fashioned” Solution Won’t Work
• US federal debt: $ 12.3 trillion
– Publicly held: 7.8 trillion
– Bills + TIPS: 2.4 trillion
• Total federal fiscal imbalance:– Through 2085: $ 53 trillion (6.9% of GDP)
– Through : 126 trillion (8.7% of GDP)
• Entitlement programs are indexed either explicitly (Social Security) or implicitly (Medicare, Medicaid)
4. Low Interest Rates: Not a Solution
Low Interest Rates
• Reduce rate of debt accumulation, so might delay financial crisis
• But low interest rates also reduce our ability to set aside the needed funds for really large future deficits
• Net impact of assuming zero interest rates for next 20 years is to increase the size of the fiscal gap, over the infinite horizon
5. On the Spending Side, It’s Clear Where the Action Is
Federal Spending Components
0
2
4
6
8
10
12
14
2010 2015 2020 2025
Fiscal Year
Perc
ent o
f G
DP
Medicare + Medicaid + Social Security
All Discretionary Spending (including Defense)
6. Health Care Reform: Contributing to the Problem, or
the Solution?
7. Would Fiscal Rules Help?
Conclusions
