The Financial Crisis: Implications for the Federal Budget

1. The Financial Crisis: Implications for the Federal Budget Marvin Phaup, Pew Charitable Trusts Remarks to ASPA Region 4 Conference, UN-Omaha, October 2, 2009

2. Disclaimer The views expressed here have not been reviewed or approved by the Pew Charitable Trusts or the Peterson-Pew Commission on Federal Budget Reform and should not be attributed to anyone other than the presenter who is solely responsible for these remarks.

3. Bottom Lines • Current crisis has added to future fiscal burden • Undiminished risk of major shock to financial security and life cycle planning • Big Q: Does current risk warrant taking action now to raise your taxes and reduce your benefits? (Straw poll: yes, no, uncertain) • A Case for NO • A Case for Yes

4. The Federal Budget Outlook Pre-Crisis • Persistent budget deficits • Increasing federal debt

5. Federal Government Deficit (-) or Surplus (+) In Billions (Historical Data 1985-2008, CBO Projection 2009-2019)

6. U.S. Net Debt, % of GDP Source: Congressional Budget Office

7. Federal Budget Outlook Post-Crisis • More of the same • Steeper upward curve • Unsustainable verdict still holds

8. CHANGES IN CBO’s BASELINE BUDGET OUTLOOK, 2007-2009(Project Annual Deficit or Surplus as % of GDP) Sources: CBO Budget and Economic Outlook, January 2007, January 2008, August 2009

9. Recessions: Change in Budget Deficits ($billion) Cumulative difference by Q4/11: $3,573 billion Cumulative difference by Q4/18: $8,515 billion 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CBO Budget and Economic Outlook for 2008 and Update for August 2009

10. Concerns about Current Policies • Intergenerational equity • Crowding out of private investment/growth • Reduced flexibility to address future problems • Vulnerable to severe external shock • Policy Unsustainable/ Change inevitable • Now or later • Adjustments (taxes and spending) smaller, less painful if made now at a time we choose.

11. Not so fast with my benefits and money • L-T projections not a forecast: extrapolation of health care costs + assumptions. We’re older and richer, want to spend more on health • How many times have we heard the sky is falling? At last check…, still there. • No obvious ill-effects of past deficits on the economy. For example….

12. U.S. Short-Term Interest Rates, 1985-2009 Source Note: US Fed Funds Rate

13. Long-Term Interest Rates, 1985-2009 Source: Federal Reserve Board

14. Real US GDP Growth, 1985-2009 Source: Bureau of Economic Analysis

15. U.S. Inflation Rates, 1986-2009Annual Average of Monthly % Change Source: Bureau of Labor Statistics

16. US $-Japan Exchange Rate, 1987-2009 (Monthly) Source: Federal Reserve Board

17. So what’s the Rush to Reduce Benefits and Raise Taxes? • I can “undo” effects of government. • I can’t be sure sacrifice is shared equitably • Wait and see if health care reform fixes

18. Second Thoughts • Simplicity of L-T Projection Suggests Understatement of Problem. • Assumes: • High employment • No recessions • No climate change or major natural disasters • No costly wars or pandemics • No spending program increases or tax cuts • Possibility of run from the dollar

19. Personal Savings as a % of Disposable Income (Flow of Funds Accounts without consumer durables)

20. U.S. Net Federal Government Saving and U.S. Personal Saving, 1999-2009 ($ billions) Source: Bureau of Economic Analysis, Haver Analytics

21. Second thoughts (continued) • Value of stability in living standards • Stability at risk from uncertain future events • Hard to protect against economic and political shocks • Increasing aggregate savings = insurance • Lower consumption now to avoid uncertain, large future losses • Desirable plan features: fair, modest = credible, small steps first toward firm target

22. Vote • Yes • No • Need more information