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.


Andre Grillon said...

Matt Franko said...

Ive been looking at these numbers also per your suggestion and agree if history is an indicator the economy may come back very quick and strong.

However, Ive been looking at the monthly treasury statement to get my deficit data, and although 1st qtr 09 was a high deficit number, what do you think the economic contribution of the 1Q TARP spending was? In other words if all the Treasury did was send $125B to the banks (Citi, Wells, BofA, JPM each got $25B) in exchange for some preferred shares to counteract mark to market losses, and $100B to AIG in return for 79.9% equity shares, is that the same as say WW2 era spending on war materials and personnel? I used to think that the only thing that mattered was getting the Govt deficit up so bank reserves/money increased and we'd be off to the races (ala Kudlow) but then Scott Fullwiler set me straight here and at WMs blog about whether reserves or money supply really matter (I'm lately thinking they dont at all!).
It seems to keep coming back to how much Govt spending/tax cuts increase aggregate demand.
I may try to modify my model to remove the TARP type or similar Govt equity investments as "spending", which would have the effect of lowering the deficit to a "real" type of data...


mike norman said...


As Warren says, "Reserve build does nothing for aggregate demand."

However, there will be some spending in the stimulus, in the infrastructure areas. It's not huge, but if it can stabilize job losses in construction and manufacturing, then that may help confidence. That's the key, but I hear ya!

Unknown said...


It seems your number in the post is off a little. What percent of GDP are we at right now?