The Economic Crisis and the Fiscal Crisis: 2009 and Beyond Alan Auerbach and William Gale

What Happened? Three Phases: 1.The Economy 2.Policy 3.The Great Recession

What Happened? Three Phases: 1.The Economy 2.Policy 3.The Great Recession Increased deficit in 2009 due to weak economy plus ARRA, TARP, etc., the economy itself the more important factor

Implications of Recent Events and Policy Interventions

1.No Worries About the Fed Having No Debt to Buy

2.What is Debt? What is Fiscal Policy?

3.The “Old-Fashioned” Solution Won’t Work

US federal debt:$ 12.3 trillion –Publicly held: 7.8 trillion –Bills + TIPS: 2.4 trillion Total federal fiscal imbalance: –Through 2085:$ 53 trillion (6.9% of GDP) –Through  : 126 trillion (8.7% of GDP) Entitlement programs are indexed either explicitly (Social Security) or implicitly (Medicare, Medicaid)

4.Low Interest Rates: Not a Solution

Low Interest Rates Reduce rate of debt accumulation, so might delay financial crisis But low interest rates also reduce our ability to set aside the needed funds for really large future deficits Net impact of assuming zero interest rates for next 20 years is to increase the size of the fiscal gap, over the infinite horizon

5.On the Spending Side, It’s Clear Where the Action Is

6.Health Care Reform: Contributing to the Problem, or the Solution?

7.Would Fiscal Rules Help?

Conclusions