Wednesday, February 18, 2009
Is the deficit/spending big enough yet to stabilize the economy?
I have frequently pointed out the fact that the deficit in 1932 hit 4% of GDP and that coincided with the stock market bottom during the Depression. Historically, it has taken deficits of about 4% of GDP to stabilize market downturns and the economy. The current deficit so far for FY 2009 (October '08 - January '09 so far) is as follows:
Deficit as a % of nominal GDP: 3.8%
Deficit as a % of real GDP: 4.9%
Historically, gov't spending as a % of GDP needs to go above 21% to have a material impact.
Spending as a % of nominal GDP: 9%
Spending as a % of real GDP: 11.6%
Remember, this data only covers a four month period (Oct '08 - Jan '09), so it seems we are on track to equal or exceed, recent, historical highs in both the deficit as a % of GDP and spending as a % of GDP. We may even come close to the WWII level. Assuming total government outlays hit $4 trillion this year (up from $2.9 trillion), that would be 34% of real GDP. Spending as a percent of GDP in 1943, 1944 and 1945 hit 43.6%, 43.6% and 42.9% respectively.