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Budget Deficits and the Gap to Be Filled

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Friday, 25 June 2010 05:49

Morning Edition had a useful piece about efforts to stimulate the economy with budget deficits and the attempt to rein in these deficits. It compared this deficit reduction to President Roosevelt's effort to balance the budget in 1937 which led to a second recession.

While the piece included some discussion of the size of current deficits, it would have been useful to note the size of the hole in private sector spending that the government is trying to fill. The collapse of the housing bubble led to a falloff in residential construction of more than $500 billion annually. The collapse of the bubble in non-residential real estate led to a drop of more than $100 billion in construction in this sector. And, the loss of housing bubble wealth led to decline of more than $500 billion in wealth driven consumption. The total loss of private sector demand is more than $1 trillion a year. This is gap that must be filled by stimulus from the government sector.

Comments (11)Add Comment
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written by izzatzo, June 25, 2010 12:20
The output gap? What about the input gap? Why the one sided bias that constantly hammers the output gap and unemployment?

What about the input gap that results in inflation and insolvency by attempting to correct the natural market forces of an output gap with gestapo government intervention, when if left alone, the output gap would correct itself by closing naturally, like petals on a flower.

Whatever happened to symmetry, equilibrium, balance and optimization that gives fair and balanced treatment to both input gaps and output gaps as equal opposing forces.

This is the sound of one hand clapping, the demand side of the scissors snipping away in thin air at the output gap, without the opposing market discipline of the supply side blade attached to prevent a collision with the input gap, a cure that's worse than the disease.

Stupid liberals.
WPA Style Priorities
written by J Snow, June 25, 2010 12:35
As Paul Krugman aptly described in the last decade, we have returned to the Gilded Age with a number of differences. These differences are:

1) We are the last standing Super Power. In the last Gilded Age there was Great Britain, France, Japan, Russia and Germany (minus Germany after we all ganged up against Germany in the Great War);

2) We have massive trade and budget deficits we didn't have in the first Gilded Age. These are due to our exporting all our manufacturing overseas less marketing, distribution, transportation, mass media, construction, defense, agriculture, aerospace and various industries that for some reason is still domestic;

3) Only 0.3% of the population is involved in agriculture making it far more painful for the unemployed and underemployed to survive in this economy;

4) The mass media is far more pervasive and intrusive than in the last Gilded Age with the average person bombarded with corporate misinformation via the Internet (Yahoo!, CNN, CBS, etc...), television, radio, newspapers, and magazines;

5) America spends more in war spending than all other countries combined. This was not true 100 years ago in the last Gilded Age;

6) Americans are far more educated than they were in the last Gilded Age. 35% of the population attends some college and therefore better prepared to sort out the nonsense spewed by the corporate mass media;

7) Life expectancy is far higher today than the last Gilded Age. As late as 1920 hospitals killed more patients than they save. Better water supply and hygiene has led to an increase of 30% to the life expectancy of the average American from 59 to 78 years;

8) Our environment and food supply are more contaminated now than ever before. Autism was not even known in the last Gilded Age. Heart attack, stroke, cancer, etc... are at higher rates than 100 years ago;

9) Technologically, we are far better off than we were 100 years ago. We have instant access to our family, friends and workplace through high speed telecommunications worldwide. We have cars, houses, electronic gadgets up the wazoo;

10) Lastly, we have the tools to make ourselves self-sustaining through the use of renewable solar and wind energy sources.

Given the above conditions, it would seem that economists would be able to develop a sustainable economic model that could replace the casino capitalistic system that we currently have in place and that is so embraced by Wall Street and the Military Industrial Complex that make Barrack Obama dance to.
none
written by Fed Up, June 25, 2010 1:22
"This is gap that must be filled by stimulus from the government sector."

If you ever decide to have a discussion about whether the gap should be filled currency or debt, I'll think about listening.
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written by Fed Up, June 25, 2010 1:24
EDIT: "filled currency ..."

TO: "filled with currency ..."
The other hand...
written by diesel, June 25, 2010 2:47
Izz
Supply? You want supply? What about all the empty houses strewn across the land?
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written by vorpal, June 25, 2010 3:45
11) We have depleted oil resources, and a huge oil dependency

12) Global oil resourcea have been depleted so that importing this resource will be more and more expensive and exacerbate an already troubling trade deficit


...
written by vorpal, June 25, 2010 4:03
12) in the Gilded Age we had a local patrician-based economy, now we have a global corporate-based economy.

What this means, is that lobbying interests have no loyalty to the US. A patrician could only exploit so much because his family lived in the region. In fact, many patricians, although they exploited, also felt compelled to give back to their communities, indeed to celebrate them.
Corporate interests only care to exploit.Moreover, the shareholders are anonymous people who may not even be US citizens.
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written by izzatzo, June 25, 2010 4:04
Supply? You want supply? We'll show you supply. Come to Detroit. We don't tolerate excess supply around here.

Pull that bubbly houses deep recession idle resources double talk economics on us and we'll show you supply sucka. We'll raze the place. Foreclosure? Hell, we burn 'em to the ground before the eviction notice hits the mailbox.

There's more than one way to deal with an output gap, and it sure as hell ain't spending more to fill it. We don't mess around. We just cut off the excess supply to match demand with our nip it in the bud program, "Honey We Shrunk the Town", which closes the output gap even quicker, leaving you Keynesian fools flatfooted in the stone age, racking up useless stimulus debt with no results.

It's the next big thing. Small is beautiful. If you can't be with the output you love, love the output you're with. So there.
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written by vorpal, June 25, 2010 4:04
correction, 1213
Mo' Motown madness
written by diesel, June 25, 2010 5:43
"Burn baby burn." "Drill baby drill." Mantras of the Palinolithic one-way mindset. But with our big-government stimulus money we hire both the dark siders to burn them down and the shining knights to put the fires out. Everything is a circle. Opposites complement and complete each other. Equilibrium prevails and all is well.

The sanctimonious tea baggers don't realize that the brighter the light of self righteousness they bathe themselves in, the darker their shadow of ignorance, intolerance and cruelty.
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written by skeptonomist, June 26, 2010 9:46
In 1937 the (remains of the) economy had been booming for four years, averaging 10% GDP growth, and unemployment had been coming down at rates that can only be dreamed of now. That period of expansion was longer than the NBER average and there is no need to call on mistakes by FDR or the Fed to account for the occurrence of a cyclical downturn. At the moment we are at the bottom of the cycle and there seems to be little movement upward (except possibly for the stock market), a completely different situation - we have at least 4 years to go to get to 1937.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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