New Records for Fiscal and Regulatory Irresponsibility

Michael Stephens | November 21, 2012

From 2009 to 2012, the US federal deficit shrank from 10.1% of GDP to 7% of GDP.  That’s the fastest deficit reduction we’ve seen in six decades—and all before the fiscal cliff has kicked in.  Here’s the chart from Jed Graham:

Put this alongside a record-setting contraction of government employment and a 7.9 percent unemployment rate, and what you have is a portrait of fiscal irresponsibility.  A lot of this deficit reduction has to do with the fact that the economy is now growing (albeit feebly), instead of contracting, but looking at this chart should also reinforce how dangerous and unnecessary it is that we’ve decided to create an austerity crisis at this moment.  (This “austerity crisis,” by the way, should really be understood to include both the possibility of going over, and staying over, the fiscal cliff AND the possibility of the cliff being replaced by a “grand bargain” on deficit reduction.)  The last time the deficit was reduced at a faster rate was in 1937, when the government embraced a hard pivot to austerity and the economy tumbled back into recession.

But don’t worry, we aren’t reliving the history of the 1930s.  Not exactly.  We are combining fiscal irresponsibility with regulatory negligence.  The Financial Stability Board (FSB) reported on Sunday that the shadow banking sector, after contracting in 2008, has rebounded nicely and is doing just fine.  Although it hasn’t quite seen the growth it did prior to the crisis, when it doubled in size from 2002 to 2007 (from $26 trillion to $62 trillion), the shadow banking sector reached $67 trillion globally in 2011—a new record, and “equivalent,” says the FSB, “to 111% of the aggregated GDP of all jurisdictions.”

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4 Responses to “New Records for Fiscal and Regulatory Irresponsibility”

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  1. Comment by Tyler HealeyNovember 21, 2012 at 2:29 pm   Reply

    At the very least we should not be making things worse by cuts in government spending targeted to the poor or increases in tax rates. Unfortunately, President Obama and Congress seem poised to do both. The Republicans want to cut Social Security, Medicare, and Medicaid, while President Obama wants to raise taxes. Maybe they’ll compromise and decide to do only a little of both, which will still cause the poverty rate to increase significantly.

  2. Comment by Domi DF — December 2, 2012 at 7:46 am   Reply

    What would the picture look like if you had used the cyclically adjusted primary deficit?

  3. Comment by JackH — December 2, 2012 at 9:50 am   Reply

    This is a nice example of manipulating numbers to support your point of view. The primary reasons for the phenomenon that you describe are the massive so-called stimulus and TARP. The former creates a “blip” and the latter really distorts (favorably) the deficit because the paybacks occurred in future years. If government accounting were akin to “real” accounting, this would not be the case.

  4. Comment by Ben Johannson — December 2, 2012 at 1:20 pm   Reply

    @ JackH

    You’ve just acknowledged that stimulus drops the deficit faster and reduces total accumulation of debt. So now you’re on Keynes side, good for you.

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