May 24, 2017

THANKS, UR!:

Trump Budget Gambles on Having This Equation Right : The macro view is sound, even if the details are often incoherent. (Tyler Cowen, May 23, 2017, Bloomberg)

U.S. President Donald Trump's newly proposed budget provides an occasion to consider some basic macroeconomics of budgeting -- namely whether "g," the growth rate of the economy, is likely to exceed "r," in this case, the government's borrowing rate. Viewed through this lens, it turns out the budget released Tuesday has a potential upside, but is best thought of as a huge unsound gamble.

For background, if we expect "g" to remain over "r," a government need not worry much about budget deficits. If the economy is growing at 2 percent and the government's borrowing rate is 1 percent, the economy can grow out of additional debt. If the government's borrowing rate is higher than growth, the debt will pile up and eventually either cause a fiscal crisis or require serious retrenchment.

Where does the U.S. stand today? Core underlying rates of real economic growth seem to be running in the range of 2 percent. In contrast, the one-year Treasury yield is slightly above 1 percent in nominal terms, and somewhat negative in real terms, depending on what you think is the proper measure of inflation. Ten-year yields are slightly above 2 percent nominal and, after adjusting for inflation, a bit above zero in real terms. In other words, right now the growth rate of the economy exceeds borrowing rates, or "g" is greater than "r."

It's the easiest time ever to be president.

Posted by at May 24, 2017 5:57 AM

  

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