What is a "sustainable" national budget deficit?

1. 72

   Ralph Deedsposted 12 years ago

   http://www.nytimes.com/2013/03/31/busin … f=business
   
   According to George W. Bush's economic adviser, Gregory Mankiw, our national goal should be a "sustainable"  national budget deficit, not elimination of the deficit. He defines a "sustainable" deficit as one that will not leave the country "too vulnerable when the next catastrophe (war or recession) strikes."

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2. 60

   CHRIS57posted 12 years ago

   From a microeconomic (business) standpoint, sustainable is whatever is necessary to do the financing of your sales. If it takes 6 months to manufacture something and linear accumulation of value is assumed, then 3 months of revenues would be allowed for sustainable debt. For a pizza baker who is buying, making and selling on a day to day period, this would mean only 1 day of revenues in debt, however add investment minus depreciation and you get the picture.
   I am no economist, but i think common sense applies to the macroeconomic side as well. There revenues are the GDP. We have to figure out how much of GDP is associated to Government. Lets make it 40% of GDP. Now public hand has to finance a lot of services and capital investment.While services are good for lets say a 4 month period and make up 75% of spenditure, the other quarter is capital investment, buildings, infrastructure, roads, coastguard, firefighting, even military, the whole show. I assume that depriciation would result in a 6 year period in average (from coffee maker to lawn mower to administration building and F22 fighter jet.
   Where does this get us?
   Services: 30% of GDP with 4 month period
   Capex: 10% of GDP with a 6 year period
   Services is worth only 30% x 4 month / 12 months = 10% debt/GDP
   Capex: is worth 10% x 6 years = 60% debt/GDP
   In total it adds up to 70% public debt. How is that for a milkmaids calculation? :-)
   We can move this up and down a little, but things get dangerous in the range of 80%. Then options for demand side stimuli get tricky. Same with supply side stimuli (cutting taxes).
   Debt is not limited to government. Every employee who receives a monthly paycheck actually is a creditor to his employer with a month period. Within that period he has to finance his living and may get into debt for 2 weeks of pay. Same story. So it makes sense to look at the whole economy, not just government. The whole is public hand, households, nonfinancial and financial business. http://www.gfmag.com/tools/global-datab … z2P91tfOv7
   Again i want to draw a line to microeconomic situations. If a company goes bankrupt, all assets in the books will just evaporate in value. I don´t have too much experience with this, but i think assets deteriorate to some 30% of pre bankrupt figures. I we look at the total assets of an economy, then i would assume them to be in the range of 600% to 1000% of GDP (i would put the US on the "rich" side with something around 1000%.) That would allow the US to accumulate a total debt of some 300% of GDP and still have all debt covered in case of a national bankruptcy. And this would explain, why the US is still a trustworthy debtor, even if current situation and administration piles another 1 or 2 Trillion of debt in the near future.

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