US Budget Deficit and Public Debt

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The 2008-2009 Financial Crisis which is commonly known as the “housing-bubble” threw the United States but other international economies into a severe recession. The first crackle of this panic was the credit boom in mid-2007. This was all influenced based on the rapid growth in credit accompanied by unstrict standards and regulations. Following the credit boom was the meltdown of subprime mortgages and other types of financial securitized products. The complexity and interlinked factors behind the rise of the ‘08-09 were the loosening of monetary and fiscal policies. GDP is the broadest gauge of economic condition, it is the natural place to start in analyzing the business cycle (Mankiw, 2009, pg 276). The Great Recession started late 2007 which was the peak of the business cycle. The peak of the business cycle is described as when business activities have reached a temporary maximum, the economy is near full employment, and the level of real output is close to the economy’s capacity. The third quarter of 2007 to the third quarter of 2008 the economic production of goods and services was approximately flat (Mankiw, 2019 pg 275). Real Gross Domestic Product (GDP) plunged sharply after the end of 2007 by 4.3% to trough of 2009 (Figure 1). Analyzing the decline in GDP, the major variables to look at are the consumption and investment panel. The shaded bar in the graph represents periods of a recession. The relationship between consumption and investment are positively related. In the period of ‘08-’09, there is a steep decline in consumption and investment. (Figure2 : a & b). When the economy heads into a recession, households, firms, and government respond to the fall in their output by consuming and investing less which has a negative affect in business generating revenue, forcing them to layoff employees.

According to FRED, from 2007 to 2009, there was a sharp increase in federal deficit of about -10% (Figure 3). The total debt as a percent of Gross Domestic Product increased from 62.86% at the end of Quarter 4 of 2007 to 82.59% in the third quarter of 2009. In Figure 5: Federal Debt: Total Public Debt, it shows the growth in total public debt. During the recession in U.S., there was a spike. The United States budget is determined by government spending and tax revenue. Government purchases are goods and services bought by the federal state and local government, excluding transfer payments. Some examples of government purchases are military equipment, infrastructures, and services provided by government workers (Mankiw, 2019, pg.27). Tax revenue is the collection of taxes on income and profit, taxes levied on goods and services, corporate taxes, property tax, estate taxes, and many others. During the recession in the U.S., government spending outweighed tax revenue budget deficit.

From the start of Financial Crisis in fiscal year 2008, the outlays of the U.S. government continued to rise at a great pace until 2010, with a total of about 5% of GDP. In the meantime, the revenues declined sharply, from 18% to 14.5% of GDP. These increase the national budget deficits to a large extent. However, after the fiscal year 2010, government spendings gradually decrease to the average level, which is 20.5% of GDP, and revenues also go up back to a steady level of about 17.4% of GDP. According to the table in the article US Deficit by Year Compared to GDP, Debt Increase, and Events, the U.S. government had a total deficit of $459 billion and owed $1,017 billion debt in the fiscal year 2008. And the deficit-to-GDP ratio was 3.1 percent. Bank bailout and Quantitative Easing were two major events which were affecting this ratio. As the Stimulus Act and Obama Tax Cuts were introduced, for the next four years, from 2009 to 2012, the budget deficit and national debt were both maintained at an over one-thousand billions high level, with the deficit reaching its maximum of $1,413 billion in 2009 and debt peaking at $1,905 billion in 2010. Since 2013, US budget deficit declines back to a lower level and fluctuated between $450 billion to $750 billion approximately. But the national debt was not so steady relatively, which went above $1000 billion again in 2014, 2016, and 2018.

The drastic shifts and changes in the U.S. economy influenced Congress to pass The American Recovery and Reinvestment Act of 2009. It is also known as “stimulus package of 2009” or the Obama stimulus pack. President Obama took office in January 2009 right after the U.S. economy suffered from a deep recession. It was signed February 17, 2009 to jumpstart the economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century (National Telecommunication and Information Administration, 2019). The act was to promote economic recovery from the 2008 Recession and spark growth. As proposed, the package would cost the federal government about $800 billion, or about 5% of annual GDP (Mankiw, 2019, pg 315) which included tax cuts and higher transfer payments, but much was made up of government purchases of goods and services. John Maynard Keynes, a British economist believed that the problem during the recession and depression is inadequate spending and the best way to understand it is through the Keynesian Cross. When the economy is at equilibrium, actual expenditure equals planned expenditure but that was not the situation during the Great Depression. In the Obama stimulus package, increased government spending was one of the objectives. As government purchases rises by △G, the planned-expenditure schedule shifts upward by △G. Applying the objective of Keynesian Cross, an increase in government purchases shifts the planned expenditure line up by △G. The equilibrium moves from point A to B which causes income to rise from Y1 to Y2. The △Y is larger than △G. The ratio △Y/△G is called the government-purchases multiplier, which tells us how much income rise in response to a $1 increase in government purchases. When the government purchases raises income, it also raises consumption, which further raises income where raises consumption, and so on (Mankiw, 2019, pg 311). An increase in government purchases causes a greater increase income. The government multiplier under Obama administration was 1.57 (Mankiw, 2019, pg 315).

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