What was the deficit situation around 1932?

[ZombieNixon]

Did the New Deal work because the government at least had money to pay the people it put back to work, like the CCC? Since the deficit is so bad today, will a "New New Deal" be all for naught since we couldn't pay for it?

[Mythsaje]

1. Now you've made me curious...

you might need to re-post it though... I don't think anyone saw it...LOL

[Zynx]

2. Deficit in 1932 was 2.7 billion

GDP was 58 billion

In 1936, deficit was 3.5 billion and GDP was 82.5 billion

[ZombieNixon]

3. What are those numbers in today's terms?

Adjusted for inflation, etc.?

[Zynx]

5. That's tough to do because there are different numbers for inflation.

Just use it as a percent of GDP which would be around 4.5 or 4.6% of GDP and that's about 1% of GDP higher.

[ZombieNixon]

6. I am by no means a financial expert.

Hell, I can balance my checkbook and keep my account in order. After a night of drinking, I find it difficult to subtract. I just thought of this after someone else mentioned a new CCC in another thread, and I wondered if it would, in fact, be possible and feasible to create a new CCC.

[tkmorris]

4. In 1932 the deficit........

In 1932 the deficit was 4.6% of GDP, whereas in 2004 the budget deficit was 3.6% of GDP. If you only take those figures into account there is room for more deficit spending.

However I would argue that there are other factors to be considered. A lot depends on what that spending actually is paying for. A National Public Works program for example could put a lot of people to work and jumpstart an economy while paying long term dividends through increased efficiency and commerce. Of course GDP would rise in response to that. Spending the same amount on SDI doesn't do much to create jobs or increase GDP.

Furthermore I would say the nation in 1932 had a lot more headroom to grow. Deficit spending then could and did expand the economy by leaps and bounds. Doing it now, or in 2008, will likely not have as great an effect because really, how much more efficient can we be? There's some room for improvement to be sure but let's face it, spending alone will do little to increase manufacturing for example here in the US.

I think this time around we are going to have to try to make some cuts in the budget in order to increase spending on other programs.

[kentuck]

7. Please explain how the GDP is relevant to the debt ??

Is there an assumption that the people will pay off the debt if it only a certain amount of GDP when people don't even want to pay any taxes today? So the only way to pay off the deficit is by cutting spending or raising taxes, is that correct? What else are people willing to cut - more funds for levees? Or how much more in taxes are they willing to pay? If there is no satisfactory answer to the last two questions, I don't see how we can argue for any more debt or any more deficits? We may as well be talking about the man in the moon....

[dsc]

8. That ratio is looked at by markets which finance the debt

If your deficit runs to high in terms of GDP then interest rates, the cost of financing that debt, will rise. It also matters since a only a certain percent of GDP will be saved and thus can be loaned out. If the deficit is too high it will take up all the available money to be borrowed.

[kentuck]

10. What happens if our borrowers decide we are no longer debtworthy?

And decide to cash in all their chips? Do we simply resort to printing more money, thus creating inflation, or do we raise taxes, or both? And if the deficit is really not that important, why would they worry about if the Social Security fund were to go into deficit? After all, it would probably be less a percentage of GDP than our present debt, ten or fifteen years from now? SO isn't that simply cryiing "wolf" about Social Security going broke?

[dsc]

11. several things

One, clearly we are in deep trouble if our foreign creditors stop buying our debt for any reason. Currently China and Japan have a vested interest in buying our debt. In China's case it keeps their currency low so they can export to us and in Japan's it is a stable market to invest in. If that stops we would have to do one of the three options you suggest. Taxes have the most room right now so that is the one we should do. Currently we won't do that though.

Social Security is a problem because our current deficit would be much, much larger but for the fact that Social Security takes in much more money that it spends. When that reverses, if we don't stop spending so much more than we take in, the deficit will rise tremendously as a percent of GDP. To take an example. Our unified budget shows a deficit of 3.6% of GDP at around $350 billion but SS had a surpluss of around half that amount. Thus the deficit would have been 5.4% of GDP without the SS surpluss. That would be a major problem in an economy which is close to full employment. Now they are crying wolf about SS on one level. The economic assumptions they use to project SS are not even close to what the economy has actually done in the last several decades.

[kentuck]

12. So the SS fund will never be totally broke ...?

So long as people are paying into it? Even if only half as many are paying, and that is difficult to fathom because I have seen population charts which show more workers in the Generation X and beyond than in the Baby Boom generation. So there will be FICA taxes being paid by a large number of people. Your numbers may be pretty close without the SS surplus? And that is probably how much would need to be borrowed each year to pay for the new deficits. However, if we could start paying down some of the debt now, the interest payments would be less in the future, and rather than borrowing for defense spending or whatever, we could borrow the money back from the fund to pay for the slim years. Yes, but that money is already spent. True, if it is spent for SS funds, it is spent for Chinese and Japanese as well. Surely we would not throw Americans overboard, simply to pay the Chinese and Japanese? So, it is not the 1.8% for SS that would be the problem as much as the 3.6% borrowed for other purposes. As we gave more and more taxcuts to the wealthy and the dead...

[dsc]

16. bingo

SS purposely ran a surplus in order to pay for the time it would be running a deficit. Instead we just kept borrowing money to pay for the rest of government. Had we used that money to pay down debt we would be just fine even under the bad SS senarios.

[Yupster]

14. Your one question is not correct

"So the only way to pay off the deficit is by cutting spending or raising taxes, is that correct? "

No that's not correct.

Most of the change of the budget surplus/defecit situation just magically happens as the economy improves or declines.

Take for example an economy where an extra two million people get jobs. Those two million people stop getting government help through unemployment, food stamps, medicaid, etc. That saves the government billions of dollars. At the same time those same families start having taxes withheld from their new paychecks which means the government takes in billions in extra tax revenues it was not expecting. It also helps social security.

Other things happen too. These new workers start going out to eat more instead of eating at home. All the sudden the states start reporting that they are getting more sales tax receipts than they expected to get. This lets the states repair more highways which hires more workers who have federal income taxes withheld.

Another important item to defecit projections is the stock market. If you buy a stock for $ 10,000 and it goes to $ 250,000, you pay no tax until you sell it. Then you pay a capital gains tax ( usually 15 %) on the gain you've made.

So, in times of great stock market gains, the govenment takes in tens of billions of dollars of unexpected capital gains taxes.

This happened during the dot.com boom of 1995-99 when the S+P went up 20 + % five years in a row. If you remember, the President and the Congress were arguing over whether it was responsible to get rid of the defecit spending in five years or six years or seven years or ten years. They would argue over cutting some program $ 1 billion, and then the new quarterly projection would come out and the defecit projection would be down $ 40 billion from the previous quarter. While they argued, the defecit disappeared sooner than any of them thought possible.

Just as an interesting aside, the most capital gains tax is often taken in when the stock market goes down. An example was 2001. Many people, especially in California bought stocks like JDS Uniphase and Intel for $ 3 a share. They saw their stocks go to $ 100, split, go back to $ 100, split and again, making them just huge profits. They never paid capital gains taxes though as they didn't want to sell them. Let's say your $ 3,000 stake in JDS had become $ 100,000. In 2000 it dropped to $ 90,000 and in 2001 it dropped to $ 85,000. Many people sold it that year to get out while they still had good profits. Therefore they would sell out at $ 85,000, and pay the 20 % capital gains tax (pre-Bush) or $ 16,500 tax in 2001 even though their stock actually lost money that year.

I believe you will see a similar spike in capital gains taxes this year even though the stock market hasn't done anything this year. The reason is that many people down here in Texas are right now selling some of their oil stocks and taking the huge gains they've made while they can.

So in answer to your question, no the only way to pay off defecits is not by cutting spending or raising taxes. Actually the changes in the economy and the stock market will usually overwhelm whatever tinkering the congress does with the tax rate or especially government spending.

Hope that makes sense.

[dsc]

9. There also is the fact that the economy in 1932 was dismall

which is why that deficit was such a large part of GDP. Our deficit is closer to being structual right now barring an increase in taxation or a deep cut in spending.

[Yupster]

13. I think you are correct dsc

In 1932 the defecit was a direct result of the New Deal spending to get out of the Depression and was very much temporary.

On the other hand, the US is currently in a positive part of its economic cycle. We should be running on maximum surplus right now. The fact that we are not shows that our defecit is structural meaning even in normal times, we spend more than we make every year by a lot.

This obviously can't go on for too long.

My own guess is that it will eventually be taken care of with a good healthy dose of hyper-inflation.

[tkmorris]

15. That's the point I was trying to make

In 1932 we had one helluva lot of upside. Our economy SUCKED but had a lot of room to grow.

Now we do not. We are going to have to dig deeper for solutions.